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January 24, 2015

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Week Thoughts: MLPs Buoyant Into Earnings

MLPs continued the rally that began on 1/14/15 this week, finishing up 3 out of 4 days, even as oil prices dropped to fresh lows.  For the week overall, the Alerian MLP Index (AMZ) increased 3.0% and the Alerian MLP Equal Weight Index (AMZE) increased 2.8%.  In the 7 trading days since the 1/13/15 bottom, the AMZ has rallied 7.9%, while the AMZE has rallied 5.9%.  MLPs are still down for the year, but have an outside shot at a positive January, which seemed very unlikely a few weeks ago.
Weekly MLP Review_1-23-15
The broader U.S. stock market was stronger this week, with the S&P 500 up 1.7%.  Oil prices finished 6.7% lower this week, closing at a fresh 52-week low of $45.44.  Oil dropped on a higher inventory build than expected on Thursday (plus a stronger dollar), and fell again Friday after the death of King Abdullah of Saudi Arabia.  Natural gas erased last week’s 5.1% gain with a 5.1% decline.
Winners & Losers
Out of index, small-cap MLPs led the way this week taking the top 3 performance slots.  High-growth drop down names rounded out the top 5, with both VLP and PSXP up 12.4%.  On the downside, it was a mixed bag with recent IPO RMP down the most at 10.5% (and now down 13.5% since IPO).  EVEP was the only upstream MLP in the bottom 5 this week despite two distribution cuts from other upstream MLPs.
EVEP was the only repeat offender on the bottom 5.  In the top 5, follow through has been limited, with winners fluctuating wildly from week to week.
Upstream MLPs occupy 4 out of 5 worst performing MLP spots so far this year. 2 Smaller, out of index MLPs make up most of the top 5.
News of the (MLP) World
Kinder Morgan’s big news and earnings release captured all the attention this week.  KMI will try to hold that attention at next week’s analyst day.  Earnings releases of actual MLPs start this week with EPD, NS and a few others this week.  The fire hose of earnings releases that’s coming in the next few weeks will be a welcome change from a few pretty quiet months in terms of company-specific data points.  Some of the news won’t be pleasant, but at least it will help the market differentiate between which MLPs are in trouble and those that are not.
Debt and Equity

  • No transactions this week. As expected, it’s been a very slow start for MLP capital markets in 2015.

M&A / Growth Projects

  • Sunoco Logistics (SXL) announced successful open season for Delaware Basin oil pipeline extension project (press release)
    • The project includes 125 miles of new pipeline with initial capacity to transport 100,000 bbls/d of oil from the Delaware Basin production area to Midland, Texas
    • Pipeline will be in operation by the first half of 2016
  • Kinder Morgan, Inc. (KMI) announced $3.0bn acquisition of Hiland Partners, a private energy company owned by billionaire Harold Hamm (press release)
    • Hiland owns natural gas gathering and processing assets, oil gathering assets and the Double H oil pipeline in the Bakken Shale
    • Some of these assets were part of a public MLP Hiland Partner that went public in 2005 and was bought back by Harold Hamm in 2009
    • KMI expects the transaction to be modestly accretive to cash flow per share and expects the purchase price to represent a 10x multiple of 2018 EBITDA
    • KMI will need some serious equity to permanently finance this acquisition and maintain its 5.5 debt/EBITDA
  • Enterprise Products (EPD) announced it will move forward with Panola pipeline expansion after receiving customer commitments (press release)
    • The Panola NGL pipeline expansion includes adding 60 miles of new pipeline, as well as pumps and other equipment to increase capacity on the system by 50,000 bbls/d
    • The Panola NGL pipeline system originates near Carthage, Texas and extends to Mont Belvieu, Texas
    • Expansion expected to be in-service by 1Q 2016 and to expand capacity
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