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August 14, 2016

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Week Thoughts: MLPs Clean Up

MLPs outperformed in a flat week for stocks, finishing up 0.8% with distributions.  The Alerian MLP Total Return Index is now down less than 5% year over year.  MLPs have treaded water for the last month or so, but comparables vs. last year continue to improve.  Oil prices rebounded this week, up more than 6%.  Natural gas and light NGLs didn’t fare quite as well.  MLPs abosrbed a flurry of small equity deals this week in a sign of continued positive fund flows.
This week, the equity capital markets pushed through 4 equity offerings that mostly went to finance drop-downs.  In addition, WPZ reduced its massive customer concentration to CHK by 25% and sold the reported on and telegraphed Canada sale.  It was a week with leftover announcements and clean-up trades.
It reminded me of picking up my son from his first sleep-away camp experience this week.  He was all smiles, but I spent the week cleaning grime off his fingernails, throwing away soiled shirts, nursing leftover bug bites and a strange skin rash he had contracted (turns out it was impetigo).
Next week, MLP management teams will get a jump on conference season with a Las Vegas conference that will give management teams a chance to reiterated messages of financial stability and resurgent development activity from 2Q earnings.   This may lead to some institutional investor rotation among MLPs in the coming weeks, and re-positioning around themes.  But other than that, here’s hoping for a quiet last few weeks of summer with a backdrop of steadily rising oil prices.
Poll Recap
Last week’s poll asked which form of sponsor support was best for the MLP.  In a quick recap, according to you readers, the best sponsor support is IDR Waivers (49%), followed by cheap drop-down acquisition funded with units to the sponsor (40%), and the WPZ-style large DRIP commitment (11%).
Translating the results into political alternatives for fiscal actions help explain the results above. If IDRs are like taxes then IDR waivers are like tax holidays, which make for a healthier consumer, all else being equal.  The cheap drop-down with equity back to the sponsor is similar to a subsidy, whereby the government reduces the cost of something vs. what it would cost in a true market-based situation.  Both of those are better than a welfare system like a sponsor DRIP commitment, whereby the consumer is able to survive, but then is less incentivized to seek independent income elsewhere.  In the case of the MLP, the constant dilution is a challenge to per unit growth.
Winners & Losers
News broke Thursday night that Carl Icahn is interested in Delek Holdings (DK), sponsor of DKL.  DK and DKL both rallied sharply Friday, adding to the good vibes following DKL’s positive quarterly results.  TLP and GLP reported 2Q results this week, which were positively received.  JPEP results, along with VTTI and PBFX’s equity deals, weren’t positively received.  In any event, the winners and losers were mostly small cap MLPs.
TGP made it 10%+ for a second straight week, JPEP made the bottom 5 for the second straight week.
Year to Date Leaderboard
YTD themes persist: beaten down small caps on top and drop down MLPs on the bottom. 4 of 5 MLPs in the bottom 5 are drop-down MLPs, with PSXP and CPPL joining the others this week.
JPEP fell out of the top 5, SUN and DKL climbed up out of the bottom 5.
General Partner Holding Companies
GPs outperformed MLPs this week, as is typically the case in a strong week for oil prices, given their higher beta and leverage to growth in underlying MLP cash flows.
News of the (MLP) World
This week was the most active for public equity offerings (based on the number of deals) in more than a year, with 4 total deals and more than $500mm in gross proceeds raised.   The smaller 3 deals were to help fund drop-down acquisitions, while the biggest one (PSXP) was not associated with an acquisition.  Discounts were tighter than they’ve been and trading was ok in the aftermarket, especially considering the volume of offerings.  Outside of the capital markets, WPZ was active in pulling more levers.

  • Phillips 66 Partners (PSXP) priced public offering of 6.0mm units at $50.22/unit, raising $301.3mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close, and traded down 2.8% from pricing in the next session
    • This is the second equity offering in 3 months and 5 days, the last one was priced at $52.40/unit
    • This is the third follow-on offering by PSXP since IPO, each at a lower price than the last (in February 2015, PSXP priced an offering at $75.50/unit)
  • PBF Logistics (PBFX) priced public offering of 4.0mm units at $20.15/unit, raising $80.6mm in gross proceeds (press release)
    • Overnight offering, priced at 6.0% discount to last close, and traded up 1.5% from pricing in the next session
  • VTTI Energy (VTTI) priced public offering of 5.25mm common units at $19.30/unit, raising $101.3mm in gross proceeds (press release)
    • Overnight offering, priced at 6.8% discount to prior close, and traded down 3.6% in the next session
    • Proceeds to be used to partially fund drop-down acquisition announced this week
  • Hi-Crush Partners (HCLP) priced public offering of 6.5mm units at $12.35/unit, raising $80.3mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close, and traded up 7.3% in the next session
    • Proceeds to be used to partially finance Blair acquisition announced this week

M&A / Growth

  • Williams Partners (WPZ) announced sale of Canadian businesses for $1.03bn to Inter Pipeline Ltd. (press release)
    • WPZ to receive $817mm in proceeds from the sale (WMB to receive $209mm)
    • In connection with the sale, WMB has agreed to forego $150mm of incentive distribution rights (IDRs) in the quarter following closing
  • Williams Partners (WPZ) announced adjustments to gathering contracts with Chesapeake Energy (CHK) in Barnett Shale and new commitments from private company acquiring acreage from CHK in exchange for $817mm cash up front (press release)
    • Complicated series of transactions that are best understood by clicking through and reading it yourself
    • But, WPZ believes the adjustments to be NPV neutral with cash in the door to support deleveraging, reduction of customer concentration and potentially increased pace of development in the Barnett Shale
  • PBF Logistics (PBFX) announced acquisition of 50% interest in Torrance Valley Pipeline Company from sponsor PBF Energy, Inc. (PBF) for $175mm (press release)
    • Assets are expected to generate $20mm in annual EBITDA, implying an 8.75x multiple
    • PBFX will enter into a 10-year contract with PBF that includes minimum volume commitments
  • VTTI Energy (VTTI) announced acquisition of an additional 8.4% interest in VTTI Operating for $96.2mm (press release)
    • Following the transaction, VTTI will own 51% of VTTI Operating
  • Hi-Crush Partners (HCLP) announced acquisition of raw frac sand processing facility located in Blair, Wisconsin (press release)
    • The Blair facility includes 1,285 acres of Northern White reserves, with plant processing capacity of 2.86mm tons of sand per year
    • HCLP will pay $75mm in cash, 7.0mm units and $10mm in earnout consideration
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