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March 1, 2014

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Week Thoughts: MLPs Drop Down

Returns for the Alerian MLP Index were slightly lower than flat for the week at -0.2%, but well below those of the S&P 500 at +1.3%.  Sharply lower commodity prices and some weak 4Q13 results by a few prominent MLPs (MWE, LINE, BBEP, XTEX, VNR and CMLP within the index) helped drag down the MLP index, while the S&P 500 hit another all-time high, and swung to a positive year-to-date return.

Weekly MLP Review_2-28-14

For the month, MLPs were down 0.2%, and are up 0.4% for the year so far.  An update on where the MLP Index stands relative to recent past performance is below.

Monthly Review

Natural gas futures prices were down 7.9% week over week, but there may have been a monthly changeover in the futures that made that drop look less drastic than it was.  Spot natural gas prices dropped more than 20%.  Ethane and propane prices likewise saw massive week-over-week declines, while oil prices were basically flat.
Earnings results were mixed this week, with the likes of OILT, TEP, and WES producing strong results, while names like LINE, BBEP, and MWE disappointed.  Earnings season started off strong, but this week’s results were less encouraging overall.  The press release machines have come to life again with drop-down announcements aplenty and large capital markets activity in debt and equity this week.  M&A activity, even if it’s mostly drop downs, is encouraging as M&A was a big driver of intra-sector returns last year.
Tax Reform Proposal
In MLP tax news, Senator Camp’s tax proposal (released on Wednesday, details can be found here) seemed at first glance to leave traditional energy MLPs unscathed.   If the intent is to spare energy MLPs from taxes that’s great, but there are some energy MLP implications to the proposal in its current (and very far from final) form.  The removal of rent and dividends from the definition of qualifying income will impact certain MLPs (including those with corporations embedded in their org charts).  Also, IDR owners could fall under the carried interest umbrella that will be subject to tax.  The market reaction seemed to focus on the positives, however, as MLPs rallied sharply on Wednesday afternoon after the proposal was released, so maybe energy MLPs really will escape intact.
Not my First Rodeo
The Houston Livestock Show and Rodeo kicked off this week. The 20-day event, considered the city’s signature event, has been held in Houston since 1931.  Entertainers from Elvis Presley to Willie Nelson to Justin Bieber have played the event.  I remember spending many a night as a kid in the parking lot of the Astrodome where the carnival was (and probably still is?) set up, alongside rows of booths featuring every possible variety of food on a stick.  The George Strait’s and Garth Brooks’s of my youth have been supplanted by newer country stars whose names I don’t recognize and by pop acts like Usher, Maroon 5, and Robin Thicke, but the Rodeo appears to be as popular as ever with 2.5mm people attending in 2013 (by comparion the Houston Astros drew just 1.65mm fans in 2013).
One of my favorite events at the rodeo was always the calf scramble.  It features 26 students chasing 14 calves.  Each student that gets a calf is awarded a $1,250 gift certificate to purchase a “registered beef heifer”.  In the event, all the calves are roughly the same and the kids are mostly in the same age range. It is mass chaos.

Calf Scramble

If I were to attempt a comparison between a calf scramble and the current MLP market, the MLPs would be the calves, but they would be varying sizes and they’d be running at varying speeds.  The MLP calf scramble would include a big mob of people chasing these calves, but they’d mostly be chasing after the fastest and fittest ones, largely ignoring the slow, sickly ones.
The current market dynamic wherein MLPs with great prospects trade much better than those that have weaker prospects is directionally rational, but can get irrational if the spreads between the haves and have-nots grows too wide.  The crowds chasing the haves MLPs can grow large enough to encourage some investors to peel off to take a second look at the slower and weaker bum steer MLPs.  So far, that’s been a dangerous proposition, and some investors have ended up trampled (see BWP and EPB).  In any event, like the calf scramble, it’s great fun to watch.
Winners & Losers
For the second straight quarter, MWE disappointed the market’s expectations and pushed out its distribution ramp up deep into 2015.  Two prominent analysts cut their rating on MWE Friday, which helped the initial Thursday selloff carry into Friday.  MWE stated on its earnings call its goal of re-entering the top quartile of the sector in terms of annual distribution growth rates (which management has stated is high single digits, low double digits).  The visibility is there for the distribution growth to ramp up, given its processing capacity dominance in the Marcellus and Utica shales and lack of IDRs, but at this point that visibility might require binoculars to spot on the horizon.
On the positive side of the ledger, TEP and OILT announced strong results and both indicated drop down transactions are in the works at their respective parent companies. NKA hit the top five for the second straight week, as it continues to recover after its big selloff around when BWP cut its distribution.


Year to date, TEP has taken the lead from PSXP, which was downgraded on valuation by one analyst early in the week.  Small-cap compression MLP GSJK popped into the top 5 this week, displacing VLP.  On the negative side, NKA climbed out of the bottom 5, replaced by AMID.


News of the (MLP) World
One very large equity offering, and two debt deals this week indicate the capital markets may be ramping up again. But the big action this week was in M&A.  We saw 4 separate drop down acquisitions announced, one asset sale (RNO), and two related third party transactions (EXLP and ACMP).  Most of these drop downs were telegraphed (WPZ) or expected as part of an ongoing drop down program (DPM, MPLX, WES).  We still haven’t seen the anything like the big third party M&A or MLP-on-MLP M&A that we saw last year, but it’s still early in the year.



  • DCP Midstream (DPM) prices public offering of 12.5mm common units at $48.90/unit, raising $611.3mm in gross proceeds (press release)
    • One day marketed offering with a file-to-price decline of 3.1%
  • Sunoco Logistics (SXL) files S-3 to register up to $250mm of primary common units (filing)


  • Williams Partners (WPZ) prices public offering of a total of $1.5bn of senior notes, including $1.0bn of its 4.3% senior notes due 2024 at 99.791% of par and $500mm of its 5.4% senior notes at 99.676% of par (press release)
  • Magellan Midstream (MMP) prices $250mm offering of its 5.15% senior notes due 2043 at 103.085% of par to yield 4.95% to maturity (press release)

M&A / Growth Projects

  • Williams Partners (WPZ) announces acquisition of the currently in-service Alberta, Canada operations of Williams (WMB) for $1.2bn (press release)
    • Assets include an oil sands offgas processing plant, 260 miles of NGL and olefins pipelines, as well as an NGL/olefins fractionation facility and butylene/butane splitter at Redwater
    • WPZ will also acquire an in-progress expansion project at the Redwater facility
    • Impact of the acquisition was included in WPZ’s 2014 guidance
    • Assets expected to contribute $200mm to $240mm of distributable cash flow to WPZ in 2015
    • WPZ to fund the acquisition with the issuance of 25.6mm Class D PIK limited partner units to WMB, $25mm in cash and an increase to the G.P.’s capital account to maintain WMB’s 2% G.P. interest
  • DCP Midstream Partners (DPM) announces acquisition of $1.15bn acquisition from parent DCP Midstream, LLC, and associated $250mm growth project (press release)
    • DPM to acquire:
      • 33.3% interest in the 720-mile, fee-based Sand Hills NGL pipeline, transporting NGLs from plants in the Permian Basin and Eagle Ford Shale to facilities along the Texas Gulf Coast and Mont Belvieu
      • 33.3% interest in the 800-mile, fee-based Southern Hills NGL pipeline, which provides 175,000 bbls/d of takeaway capacity from the Midcontinent to Mont Belvieu
      • Remaining 20% interest in the Eagle Ford system (will now own 100%), which includes 7 integrated plants with total processing capacity of 1.2 bcf/d
      • Lucerne 1, a 35 mmcf/d cryogenic natural gas processing plant located in the DJ Basin, and includes a long-term fee-based processing agreement with DCP Midstream
    • DPM to build Lucerne 2 plant, a 200 mmcf/d plant, which will include a 10-year fee-based processing agreement with DCP Midstream
      • Will be connected to the Front Range Pipeline for NGL takeaway capacity to Mont Belvieu
      • Expected to be in-service by mid-2015 and will cost $250mm overall (but just $180mm additional capital expenditure following close of acquisition)
  • MPLX LP (MPLX) announces $310mm drop down acquisition (press release)
    • MPLX to acquire an additional 13% interest in MPLX Pipe Line Holdings LP from parent Marathon Petroleum Corp
    • 2nd drop down acquisition since IPO in October 2012
    • Will increase interest in MPLX Pipe Line Holdings to 69%
    • To be funded with $40mm of cash on hand and $270mm of credit facility borrowings
    • 10x EBITDA multiple, implying $31mm of EBITDA
  • Western Gas (WES) announces $375mm worth of drop down acquisitions (press release)
    • WES to acquire 20% interest in each of Texas Express Pipeline LLC and Texas Express Gathering LLC, and a 33.3% interest in Front Range Pipeline LLC from Anadarko Petroleum (APC)
    • 100% fee-based assets that gather and transport liquids from the Anadarko, Permian, and DJ Basins
    • WES to finance the acquisitions with $350mm of credit facility borrowings, $6mm in cash and 308,490 common units (at $60.78/unit) issued to APC
  • Access Midstream (ACMP) announces acquisition of certain midstream compression assets from a subsidiary of Chesapeake Energy Corp for $160mm (press release)
    • Acquisition adds natural gas compression assets, historically leased by ACMP, in the Utica and Marcellus Shale regions
    • Transaction allows ACMP to in-source compression costs in the area at an 8.0x EBITDA multiple
    • Assets include more than 100 compression units with a combined capacity of ~200,000 horsepower
  • Exterran Partners (EXLP) announces acquisition of compression assets from a subsidiary of Chesapeake Energy Corp for $360mm (press release)
    • EXLP to acquire 334 compression units, with a total horsepower of ~440,000, which currently are being used to provide compression services to a subsidiary of Access Midstream (ACMP)
    • EXLP and ACMP have entered into a 7-year services agreement, under which EXLP will provide compression services to ACMP in the Permian, Eagle Ford, Barnett, Anadarko, Mississippi Lime, Granite Wash, Woodford, Haynesville, and Niobrara Basins
  • Rhino Resource (RNO) announces sale of its oil and gas properties in the Utica Shale to Gulfport Energy Corp. for approximately $185mm (press release)
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