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December 3, 2016

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Week Thoughts: MLPs Can't Win For Losing

MLPs declined for the week overall after serious de-risking Monday and Tuesday, followed by one glorioius day on OPEC Wednesday, then we got choppy trading the rest of the week.  MLPs finished the week 2.1% higher than Tuesday’s close and finished positive on Friday, but the sector has underperformed other commodity beta stocks in the short sample size of trading post-OPEC.
According to traders at various Wall Street firms, MLPs were being used as a “source of funds” for generalist energy investors to buy more oil beta stocks with exposure to second tier basins that should benefit from higher oil prices.  Despite that commentary about MLPs being a source of funds, MLPs haven’t really experienced a rally that would suggest they were a use of funds, at least not within the last 5 months.
So, the sector seems like it “can’t win for losing”, which is a strange idiom that doesn’t make much sense, but apparently means despite all their effort they can’t win.  KMI this week is a fair example.  KMI got earlier than expected approval of the largest single pipeline project in their backlog, which is expected to generate positive returns and potentially could be a JV source, announced on the same day OPEC sent oil shooting higher.  But rather than a forceful rally, KMI underperformed other midstream companies on Wednesday, Thursday and Friday.
Poll Question: Holding Back
MLPs seem to have gained a few tailwinds over the last month, but aren’t seeing follow through, unable to string together two positive days this week despite Oil’s best week in 5 years and natural gas’s best week in 5 months.  I’m interested in your take on why MLPs haven’t experienced high correlation to oil prices when they went up this week.
Sorry, there are no polls available at the moment.
Status Update
MLPs were saved on the final Day of November by the massive OPEC rally.  November was positive, cutting the 4Q to date decline in half.  As of the end of November, MLPs were up 13% for the year including distributions, but have stagnated really since the initial bounce in the first half of the year.
The broad market had a strong November, especially small caps (the Russell 2000 finished +11.2%), on good vibes for a more positive outlook under a pro-business government.  MLPs lagged that trend as well.  MLPs may have to wait for the 2017 reset before breaking beyond the 300.
The Alerian MLP Index crossed 300 three times this week alone.  The AMZ index closed above 300 on the last day of November in 2015.  The AMZ then spent 115 days below 300 before closing back above on 5/17/16.  Since then, the index has closed with a value that crossed the 300 a total of 12 times.
Winners & Losers
Because of the pending merger with its sponsor, RIGP now trades with sponsor Transocean, a major offshore drilling company.  So, RIGP led the way this week following the OPEC news that sent RIGP more than 16% higher Wednesday.  One of the weaker performers last week, ENBL, rebounded, while last week’s worst performer, FGP, brought up the rear this week too.
Year to Date Leaderboard
Drop-down growth stories SHLX and PSXP outperformed the index this week, but they each have a long way to go.  No changes to the winners, although AMID is closing in on the others.
G.P. Holding Companies and Midstream Corporations
The GPs and midstream corps outperformed MLPs again this week.  AHGP went from worst to first on better natural gas prices.  SEMG was the only repeat among the winners, as the sector continues to lack follow-through on individual names from week to week.
News of the (MLP) World
Quiet week on the M&A front, but the sector did add $4bn+ to the development backlog following Trans Mountain’s approval.  Equity deals continue, and discounts remain wide.  Interest rates on term debt remain attractive relative to earlier this year, despite the recent rate spike post-election.
Capital Markets

  • Hoegh LNG Partners (HMLP) priced public offering of 6.0mm units at $17.60/unit, raising $105.6mm in gross proceeds (press release)
    • Offering upsized from original 5.5mm units
    • Overnight offering, priced at 8.1% discount to prior closing price
  • Brookfield Infrastructure Partners (BIP) issued 15.625mm units on a bought deal basis to a syndicate of underwriters at $32.00/unit, raising $500mm in gross proceeds (press release)
    • BIP also issued $250mm to Brookfield Asset Management for total proceeds of $750mm
  • Plains All American (PAA) filed equity distribution agreement to sell up to $750mm worth of common units at-the-market (filing)
    • PAA priced large bond issuance last week, and seem to have shored up the equity financing plan this week
  • Targa Resources Corp (TRGP) filed equity distribution agreement to sell up to $750mm of common shares at-the-market (filing)
  • Tesoro Logistics (TLLP) priced $750mm of 5.25% senior notes due 2025 at par (press release)
  • Valero Energy Partners (VLP) priced $500mm of 4.375% senior notes due 2026 (press release)

Growth Projects / M&A

  • Kinder Morgan (KMI) announced final federal approval for Trans Mountain pipeline expansion (press release)
    • Project would begin construction in September 2017 following additional permitting, and is expected to be in-service by late 2019
    • KMI expects to announce final cost estimate following fresh internal review of the $6.8bn (Canadian dollars) project
  • Hoegh LNG Partners (HMLP) announced acquisition of 51% interest in the Hoegh Grace floating storage and regasification unit (FSRU) from sponsor Hoegh LNG Holdings for $188.7mm (press release)
    • The Grace FSRU is supported by a 20-year charter agreement
    • Assuming the transaction closes, HMLP is prepared to increase distributions by 4-5% in 1Q
    • The acquisition will be partially financed with proceeds from the above equity offering
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