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July 8, 2012

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Week Thoughts: MLPs Clean Up

MLPs were up 2% when almost everything else was down or flat this week.  Treasuries were also  up, sending the interest rate on the 10-year lower, but I don’t believe there is much of a causal relationship between week to week changes in interest rates and week to week MLP performance.  Certainly MLP relative strength of late has something to do with interest rates generally being excessively low, but that’s not something moves the market week to week (unless rates spike up 50 bps).

One of the causes or effects of the treasury rise (and crude and gold weakness) this week was US Dollar strength.  The DXY, the USD spot index, closed the week at its highest point since July 2010.  Conversely, the Euro reached its lowest point vs. the Dollar in 2 years.   A strong dollar is a good thing for MLPs, to the extent it represents a flight to safety that will benefit treasuries and keep interest rates low.  On the flip side, commodities priced in USDs will not benefit from a higher Dollar, so its probably a wash on the whole for MLPs.  But…QE3 could change all of that.

AMJ Premium Update
This week, AMJ under-performed the underlying Alerian MLP Index significantly, but is still trading at a premium after June, when AMJ outperformed by 277 basis points.  Year to date AMJ has produced a total return of 2.4% compared with 1.6% for the Alerian MLP Index.  See below for a monthly breakdown of total returns for AMJ and its underlying index so far this year.  Before June, AMJ tracked very closely, and then when JP Morgan capped new creations of the ETN in June, AMJ took off.   Not sure what the premium will come to signify going forward, perhaps it can be a proxy for general MLP sector interest (or not), but it is interesting to watch.

Clean Up Week
Given it was the end of a quarter, several previously announced acquisitions closed this week.  Most of the press releases this week seemed to be of the clean up variety, announcing transaction closings and announcing dates for earnings releases and conference calls.
The transactions that closed included:

  • DPM’s acquisition of Crossroads system from PVR for $63mm
  • DPM’s acquisition of interests in Mt. Belvieu fractionators for $200mm
  • CLMT’s acquisition of Royal Purple, Inc. for $333mm
  • XTEX’s acquisition of Clearfield Energy, Inc for $210mm
  • BBEP’s acquisition of 2 Permian Basin acquisitions for $220mm total
  • VNR’s acquisition of properties from Antero for $434mm

News of the (MLP) World
There were a few MLPs busy with new news this week, NS and EEP most notably.
NS Announced Sale of 50% of Asphalt Business (press release), Provided 2Q Guidance (press release)

  • NS to sell 50% of its asphalt business to Lindsay Goldberg for $175mm and form JV to operate asphalt refining operations
  • NS expects $400-$500mm in cash proceeds from the JV, depending on working capital requirements of the business
  • NS says asphalt segment expected to have negative EBITDA this quarter, compared with $55mm in second quarter 2011
  • NS expects significantly lower second quarter EBITDA than last year, due to asphalt and fuels marketing weakness
  • Also, S&P lowered NS’s credit rating to BB+ from BBB-, so NS is no longer investment grade (reuters)
    • Higher than expected leverage, Debt to EBITDA covenant amendment needed in the coming quarters

Enbridge Energy (EEP) Updated Guidance (press release)

  • EEP announced revised 2012 EBITDA guidance range of $1.12-$1.17 billion, down from $1.19-$1.25 billion, or 5.7%
  • NGL price declines were cited
  • EEP reiterated annual distribution growth guidance of 2% to 5%

EROC Re-started Phoenix-Arrington Ranch Plant (press release)

  • Plant serves Granite Wash area
  • Was shut in on 4/30, financial impact of $2-3mm in EBITDA, before insurance recoveries, or roughly 1% of consensus 2012 EBITDA estimates

SPH Sweetened Exchange Offer for NRGY Notes (press release)

  • NRGY bondholders have pushed back, and who can blame them? If you bought bonds in NRGY you were buying bonds of a combination propane and midstream MLP, and now you are being asked to convert into bonds of a pure propane MLP, albeit one that has been under much less distress than NRGY was / is
  • SPH offering 0.50% higher interest rate than its initial offer
  • SPH offering $65mm more in aggregate cash to holders of NRGY notes (equal to $65 per $1000 of notes if consents are delivered for all $1.2 billion outstanding notes


  • NGLS filed S-3 for $300mm of securities (filing)
  • MPLX LP (Marathon’s MLP) filed initial S-1 (filing)
    • Owns 51% indirect interest in Midwest & Gulf Coast crude and refined products pipeline and storage assets
  • SeaDrill announced that the company has filed its initial S-1 confidentially (reuters)
    • MLP IPO “pipeline” nearing capacity, but more to come

That’s all I’ve got this week, thanks for reading and sharing.

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