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November 23, 2014

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Week Thoughts: MLP Weighting Game On

MLPs had their best week since early August, outpacing the broader equity markets as energy commodity prices stabilized.  The Alerian MLP Index was up 3.4%.  U.S. domestic oil price finished the week with back to back positive trading sessions to close the week up 1.2%.
Expect volatile oil price trading next week ahead of OPEC’s 11/27 meeting, when some expect OPEC will announce production cuts to support pricing.  If WTI oil drifts up to $80, it should be a nice tailwind for MLPs.  But even if oil prices revert back into the producer comfort zone of $85/bbl+ in the next few weeks, this selloff has woken the market up to the fact that demand for oil globally has a limit.
Weekly MLP Review_11-21
The Kinder family of MLPs will go away next week.  It’s all over but the taxes now.  This week was a nice bookend to the KMI transaction, because it was the best week for MLPs since the week the KMI deal was announced.
Alerian removed KMP and EPB from the MLP indices as was largely expected, but Alerian didn’t take this opportunity to expand the number of stocks included in the index.  With more than 120 energy MLPs trading today, a hard cap of 50 seems outdated in some respects, but so does the Dow Jones Industrial Average.  Chances are if the cap wasn’t expanded beyond 50 with the ex-Kinder rebalance, it won’t be expanded any time soon.
If you enjoyed this week’s rebalancing act, more index changes are in the offing the next few months, as a byproduct of consolidation.  OILT was added this week, but once EPD acquires the remaining units, OILT will need to be replaced.  WPZ and APL will also need to be replaced in the coming months as their respective mergers close.  The special rebalancing events will continue to be short term stock price drivers for MLPs that get added or see their weights grow.  Between IPOs, consolidations and rebalances, the sector continues to be as dynamic as ever.
Winners & Losers
None of the biggest winners and losers announced any company specific new this week.  NGL was the biggest winner from the Alerian announcements this week, benefitting from a step up from the Alerian MLP Index into the more exclusive Alerian MLP Infrastructure Index, which includes only 25 stocks and is tracked by the biggest MLP ETF.  NKA continues to be very volatile, up 38.6% after falling 15% last week.  NKA is still down 51% so far this year and sports a 24% yield.  On the downside, shipping MLPs were hit hard by a downgrade early in the week, many of them recovered but HMLP and DLNG did not.
With less than 30 trading days left in 2014, PSXP holds a narrow lead on the sector for year to date returns.  TCP popped into the top 5 this week, displacing DM, on improving sentiment for the long-dormant TCP drop-down story.
News of the (MLP) World
Energy Transfer’s analyst day was the news focus early in the week.  ETP did not disappoint, announcing a new large scale growth project plus asset shuffling involving IDRs and the Bakken pipeline project.  ETP also filed a fresh ATM, joined by MWE and OKS who also filed ATMs.  No marketed equity offerings, no MLP IPO filings and no big M&A announced this week.  Expect limited equity offerings in the next week, followed by a flurry of activity after Thanksgiving.  Later in the week, the focus shifted to the fallout of the Alerian MLP Index changes as a result of the KMI consolidation transaction.

  • Energy Transfer (ETP) filed equity distribution agreement to sell up to $1.5bn of common units at the market (filing)
  • Oneok Partners (OKS) filed equity distribution agreement to sell up to $650mm of common units at the market (filing)
  • MarkWest Energy (MWE) filed equity distribution agreement to sell up to $1.5bn of common units at the market (filing)
    • MWE also included 4.0mm of units owned by Energy Minerals Group in the ATM, down from 20.0mm that were originally issued to EMG back in December 2011


  • Boardwalk Pipeline (BWP) prices $350mm of 4.95% senior notes due 2024 (press release)
    • BWP will use the proceeds to retire $250mm of 5.05% senior notes due in 2015

M&A / Growth Projects

  • Lone Star NGL, a JV between Energy Transfer (ETP) and Regency Energy (RGP), announced plans to construct NGL pipeline from Permian Basin to Mont Belvieu (press release)
    • Lone Star will also convert its existing West Texas 12-inch NGL pipeline into crude oil/condensate service
    • All-in the pipeline and conversion are expected to cost $1.5-$1.8bn and are expected to be operational by 3Q 16 (pipeline) and 1Q 17 (conversion)
    • ETP owns 70% of Lone Star, RGP owns 30%
  • Energy Transfer (ETP) announced exchange with Energy Transfer Equity (ETE) of 40% interest in SXL’s IDRs for 30.8mm ETP units and 45% interest in its $5bn Bakken pipeline project (press release)
    • Transaction valued at $3.75bn
    • ETP will end up owning 75% of the Bakken pipeline project
    • ETE will own 90% of SXL’s IDR cash flow
    • ETP is expected to execute a similar transaction with SUN’s GP next year
    • Owning and being a seller of IDRs is a good position to be in, and ETP will be able to use those interests to fund growth projects
    • SXL will probably not participate in the Bakken pipeline project
  • Tallgrass Energy (TEP) and Hiland Crude, LLC announced joint open season for oil pipeline capacity from Montana and Wyoming receipt points to delivery points in Cushing, OK (press release)
    • Hiland will expand its Double H pipeline and Tallgrass will expand its Pony Express pipeline (33% owned by TEP) to accommodate shipper commitments they receive
    • Open season ends 12/12/14
  • Magellan Midstream (MMP) extends open season for Saddlehorn pipeline project (press release)
    • Open season will now close on 12/15/14, and will include 3 receipt points not included in original open season
  • Williams Partners (WPZ) announced FERC application to expand its Transco pipeline system (press release)
    • WPZ seeking to expand capacity in Alabama beginning in May 2017 and will add 1.13 dekatherms/day by 2021
    • Sabal Trail pipeline will lease 100% of the new capacity on a long-term basis
    • Part of the $4.5bn in planned capex related to the Transco pipeline system through 2017


  • Alerian announced a number of changes this week:
    • OILT to replace QRE in the Alerian MLP Index (press release)
    • MMLP and VLP to replace KMP and EPB in the Alerian MLP Index (press release)
    • NGL and TCP to replace KMP and EPB in the Alerian MLP Infrastructure Index (press release)
  • Transcanada responds to activist hedge fund recommendations as “flawed” (press release)
    • Analyst day for TRP also happened this week, no change in the strategic drop-down plan
  • Exterran Holdings to spin off international business and become a pure play GP (press release)
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