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August 15, 2015

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Week Thoughts: MLP Sponsors Answer the Call

With 2Q MLP earnings season finally in the books, and with all the negative MLP-specific news priced in for another 90 days, MLPs traded much better this week, even with another leg down in oil prices to fresh lows.  The Alerian MLP Index (AMZ) increased 5.2% including distributions.  Volatility continued, as daily action alternated between positive and negative each day this week.  Large cap MLPs outperformed smaller MLPs (equal-weight Alerian up only 4.2%), a positive indicator of fund flows into the sector.  In a reversal of last week, MLPs outperformed other equities by a wide margin, including U.S. stocks (S&P 500 +0.7%) and utilities (+2.1%).
Weekly MLP Review_8-14-15
MLPs appeared oversold last week, and were due for some relief.  Oil sentiment continues to weigh on the MLP sector, but if oil prices show signs of life in the coming weeks, MLPs should trade higher, given there will be limited equity issuance and oil price sentiment seems to have been the main driver of the recent MLP draw down.
PIPEs, like we saw this week with OKS, are positive for the sector (even if they are done at steep discounts and result in significant dilution) because they reduce the sector’s equity absorption needs (i.e. overhang).  The $750mm bought by sponsor OKE and Kayne Anderson is $750mm the ATM and public capital markets don’t have to take down in the zero sum capital environment.
Investors short the MLP sector heading into earnings now have fewer catalysts ahead (beyond oil prices, which can be shorted more directly elsewhere), which may lead to technical tailwinds from short covering in the short-term.
Several sponsors stepped in to aid their struggling MLPs this week (OKS, AMID, HMLP, KNOP), and the market reaction was positive in most cases.  Further evidence of sponsor commitment to MLP financing vehicles with out of whack prices should come through as other sponsors take note.
All-in-all, after clawing back around half of last week’s decline in value in a down oil price week, sentiment is clearly improved from last week (could not have gotten much worse) and the sector seems better positioned to sustain a rally in the near-term.  Having said that, after several head fakes over the last year, caution is still warranted with oil prices at 6 year lows.
Winners & Losers
AMID was the runaway winner after announcing a dropdown acquisition at an attractive multiple and guiding to 5% annual distribution growth.  PTXP and USDP both rallied after announcing earnings. The bottom five was again dominated by Upstream MLPs (E&P and Coal) while SXE quarterly earnings did not impress the market in a positive way.
Top5Bottom5_8-14-15
Back to back 30% declining weeks is not typical, but it happened to NSLP, which now trades under $0.60/unit.
Top5Bottom5_8-14-15_chart
For YTD, VLP jumped into the top 5 replacing MMLP while the rest of the top and bottom names are unchanged with some shifts in the order.  After another poor showing this week, NSLP is now down more than 90% YTD.
Top5Bottom5_8-14-15_ytd
Top5Bottom5_8-14-15_ytd_chart
General Partner Holding Companies
All but three GPs generated positive returns this week after all were negative last week.  ATLS jumped 23% after reporting earnings this week and PAGP clawed back some losses from last week’s debacle.  ETE and WMB performed strongly on no news (perhaps positive merger vibes) while OKE rounded out the top 5 despite falling late in the week after the OKS deal.  There weren’t any clear trends or drivers of performance among the bottom 5.
Top5Bottom5GPs_8-14-15
Top5Bottom5GPs_8-14-15_ytd
News of the (MLP) World
News-of-the-World
Equity

  • ONEOK Partners (OKS) announced private placement of 24.8mm units at $30.17/unit for total gross proceeds of $750mm (press release)
    • OKS sponsor ONEOK, Inc. (OKE) acquired 21.5mm units for $650mm
    • Kayne Anderson acquired 3.3mm units for $100mm
    • OKE will also contribute $15.3mm to maintain its 2% G.P. interest
    • OKE will now own 41.2% of OKS, up from 36.8% prior to the offering
    • Price represented 8.3% discount to prior closing price
    • OKS units closed flat from the prior trading session (and well above the purchase price), outperforming the MLP Index the next trading session, on the removal of equity overhang, it appears
  • Sunoco Logistics (SXL) filed S-3 to register up to $1.0bn of common units (filing)
    • SXL issued $242mm on its ATM in 2Q, and has issued $384mm so far on its ATM through the first 2 quarters of 2015 ($947.8mm total equity issued in 2015 including overnight issuance, 2nd most of all MLPs after PAA)
  • Enterprise Products (EPD) filed equity distribution agreement to raise up to $1.9bn worth of common units at-the-market (filing)
    • 19 banks are party to the agreement
    • EPD issued $359.3mm on its ATM in 2Q15, and $767.1mm through the first 2 quarters of 2015

M&A / Growth Projects

  • MarkWest Energy (MWE) announced development of new dry gas gathering system, supported by long-term, fee-based contract with Ascent Resources (press release)
    • System will be designed to gather more than 2 bcf/d of gas and initial operations are expected to begin by the end of 2015
    • Total investment developing gathering assets in the region could exceed more than $1bn over the next 3 years
  • American Midstream (AMID) and sponsor ArcLight Capital announced $162mm drop-down acquisition and future drop down plans (press release)
    • Arclight agreed to sell 25% of its 51.7% interest in Delta House, which owns oil and gas infrastructure assets in the deepwater Gulf of Mexico
    • Purchase price represents 5x next 12 months EBITDA
    • AMID also announced intention to resume 5% annual distribution growth following the close of the acquisition
    • AMID also highlighted $1bn of drop-down acquisitions through 2017 that will support distribution growth
  • Variable distribution fertilizer MLPs CVR Partners (UAN) and Rentech Nitrogen (RNF) announced merger valued at $839mm (press release)
    • For each unit, RNF unitholders will receive 1.04 units of UAN and $2.57/unit of cash
    • RNF will retain ownership of RNF’s Pasadena facility
    • Price implies 14.1% premium to RNF’s 30-day average price through 8/7
  • Kinder Morgan (KMI) announced acquisition of four new 50,000 deadweight ton product tankers for $568mm (press release)
    • Each tanker (currently under construction) will have 337,000 barrels of capacity and will be delivered between November 2016 and November 2017
    • The tankers will be placed in U.S. domestic service under the Jones Act
  • Hoegh LNG Partners (HMLP) announced drop down acquisition of Hoegh Gallant for $370mm (press release)
    • The Gallant is a floating storage & regasification unit (FSRU) operating under a charter that extends through 2020, but HMLP’s sponsor has agreed to backstop the agreement at 90% of its current rate through 2025
    • HMLP also announced intent to increase distributions 22% from current levels with its 4Q distribution post-closing of this acquisition

Other

  • KNOT Offshore (KNOP) announced authorization of 1.0mm unit buyback program (press release)
    • KNOP authorized to purchase 666,667 common units, KNOP’s G.P. authorized to purchase 333,333 common units
    • 0mm units equates to around $15mm, and will reduce KNOP’s already thin float
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