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December 28, 2014

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Week Thoughts: MLPs Extend Hanukkah Rally

MLPs shrugged off another week of declining commodity prices to finish higher for the second straight week.  The Alerian MLP Index (AMZ) was up 1.3% overall, while the Equal Weight version (AMZE) finished the week down 0.6%.  In the 8 trading days starting 12/16 (the first day of Hanukkah this year), AMZ has gained 9.1%.
Weekly MLP Review_12-26
Natural gas did its best to catch up with oil’s decline this week, down around 13% on continued warm weather.  At nearly 60 degrees on Christmas Eve in the suburbs of Philadelphia, a white Christmas it was not.
So far this month the AMZ remains down 5.7%, on pace for a third straight negative month to close out the year. Year to date, AMZ has produced positive total return of 4.8%, and should make it 6 straight positive return years for MLPs and 13 positive years out of 15 since 2000.  MLPs (as a diversified group, on average) continue to produce consistently positive returns through a variety of environments.
Update: AMZ vs. AMZE
Large cap outperformance from KMP and others, combined with upstream MLPs being crushed by the commodity glut, led to a record year in 2014 for the Alerian MLP Index vs. the Alerian MLP Equal Weight Index. Each index has a weighting system that doesn’t seem quite right.  EPD at nearly 18% of the AMZ by itself seems like an unreasonable depiction of the MLP universe.  But in the AMZE, EPD and ARP and HCLP all have the same weight, which is too far in the other direction.  In our view, the answer is for both indices to increase the number of MLPs included beyond 50 names, which would make them both more representative of the MLP market.
A true representation of the MLP universe performance is somewhere in the middle of the AMZ and AMZE, but as shown above that middle is much wider than usual.
Winners & Losers
The big winners this week were a random mix of four 2014 IPOs and BKEP.  USDP and JPEP were both October IPOs that have traded very poorly.  Even after this week, JPEP closed the week 36% below its IPO price, and was the biggest MLP loser last week.  HMLP likewise is trading below IPO price.  DM, on the other hand, popped on day one and hasn’t slowed down since.  Upstream MLPs dominated the bottom 5, as you would expect on a negative oil and gas week absent company-specific news.
JPEP and BKEP went from the bottom 5 to the top 5 this week, no other repeats when compared with last week.
With just 3 trading days left, DM is making a run for the top spot in 2014, but PSXP is still clinging to the lead for now.  On the downside, it’s still anyone’s game.  I can’t recall a year that had a wider disparity between the winners and losers.  As the commodity price shock works its way through the MLP system, expect a similarly wide spread between winners and losers in 2015.
News of the (MLP) World
There was very little news this week, as expected.  EEP and ETP announced details of previously announced transactions, cleaning things up before year end.  Expect about the same level of press release action next week.

  • ARC Logistics (ARCX) files S-3 registration statement to sell up to $500mm worth of common units (filing)

M&A / Growth Projects

  • Western Gas (WES) announced the expiration of the option on Nuevo Midstream acquisition (press release)
    • A third party (ACMP) had an option to acquire a 50% stake in Nuevo
    • WES will acquire 100% of Nuevo for $1.5bn
  • Enbridge Energy (EEP) announced approval of previously-announced Alberta Clipper Pipeline drop down (press release)
    • EEP will pay $1.0bn for the remaining 66.7% interest owned by sponsor Enbridge, which represents a 10.7x EBITDA multiple
    • EEP originally announced (In September) that the transaction was valued at $900mm
  • Energy Transfer (ETP) announced finalized terms of previously announced exchange of interest in the Bakken Pipeline project from Energy Transfer Equity (ETE) for interests in SXL’s Incentive Distributions Rights (press release)
    • ETP will receive for redemption 30.8mm ETP units owned by ETE, ETE’s 45% interest in the Bakken Pipeline project and $879mm
    • ETE will receive an additional 40% interest in the SXL GP/IDRs, and ETE will reduce IDR subsidies from ETE to ETP in 2015 by $55mm and in 2016 by $30mm
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