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November 2, 2014

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Week Thoughts: MLPs Fall Back

MLPs sold off this week, moving in the opposite direction of the broader stock market and other yield-based equities (like utilities).  Interest rates and commodity price movements likely weren’t much of a factor in the underperformance.  Distribution ex-date trading was likely in MLP weakness.  Another potential driver is MLP investors reassessing valuations and long term growth expectations in light of what appears to be a sustained lower commodity price environment.
Weekly MLP Review_10-31
This week’s price action, uncorrelated with oil prices or the broader stock market, is an affirmation (although not a welcome one when MLPs are down) of the lack of correlation between daily movements of oil prices and MLP price changes.  This week, we published a short whitepaper on the topic of MLP correlation with oil. You can find it here.
The end of this week marks the end of another month for MLPs.  October was the second straight negative month for the MLP Index, which was down 4.7% including distributions.  It was the worst October ever for the MLP Index.  November has historically been a weaker month on average for MLPs, but seasonality has been off this year, with an unusually strong August and weak September.
Extreme Growth MLPs
Shell priced its MLP IPO this week.  It was biggest, lowest-yielding MLP of all time, with the biggest first day pop after the IPO priced.  SHLX’s strategy (similar to DM, EQM, PSXP and other high-profile growth MLPs) appears to be to get to the 50% tier as quickly as possible to recognize the IDR value as soon as possible.
This quarter, PSXP announced a distribution that is 49.2% higher than IPO in just the 5th quarter since IPO.  That got me curious as to what the record is for the fastest MLP to get to the top tier.  The record is 6 quarters for now, and PSXP will join the 6 quarter club below.  EQM reached the 50% tier in 8 quarters.
Fastest to 50% tier:

  • 6 Quarters: Hiland Partners (which was taken private) and NGLS (Copano raised its distribution 50%+ in 6 quarters, but it had no IDRs)
  • 7 Quarters: DPM
  • 8 Quarters: MWE, TLLP, EQM

Investor push back at IPO on incentive distribution rights has not existed because IDRs are thought of as something that only becomes a problem much later.  If MLPs continue to push initial growth to the extremes, and total cash to the GP grows more quickly, does the life-cycle of some MLPs get shorter?  Do they more quickly reach the point KMP reached this year where the IDRs make it difficult for the MLP to grow?
A shorter life cycle eventually could put pressure on MLPs to have better mechanisms in place at IPO for keeping IDRs in check.  It’s hard for investors to push back when the growth MLPs have been so successful, but at some point the model might get too extreme, leading to a backlash among investors.  The backlash may come when these extreme growth start launching IPOs of their general partners within 2 years of their MLPs going public.
Winners & Losers
Commodity sensitive (NSLP), distressed (NKA and RNO) or oilfield services MLPs (HCLP and SDLP) comprise the bottom 5 this week.  The two most recent IPOs (DM and SHLX) and MLPs with strong earnings (ARLP) or announcements related to earnings (MPLX) dominated the top 5.  Expect IPOs and earnings announcements to continue to show up at the top and bottom ends of the MLP return spectrum next week.
Top5Bottom5_10-31-14
Top5Bottom5_10-31-14_chart
For the month of October, IPOs ruled on the upside while dramatic revaluations dominated the downside.  SHLX and DM were both up more than 40%, followed by MPLX and ARLP each up more than 12%. On the downside in October, RNO and NKA were both down more than 50%, QEPM down 30%+ and upstream MLPs LGCY and NSLP were each down 20%+.  Compared to last month when large cap, mature MLPs topped the MLP charts, this month it was much younger or smaller MLPs in the top 5.
Top5Bottom5_October
Year to date, MPLX’s big week pushed it up into the top 5, displacing RRMS.  NKA went from outside of the bottom 5 last week to second worst on the year this week.  BWP, which was an early favorite for biggest loser of the year early in 2014, has floated higher on the list.
Top5Bottom5_10-31-14_YTD
Top5Bottom5_10-31-14_YTD_chart
News of the (MLP) World
This week we saw two high up-front multiple, strategic acquisitions totaling $2.3bn, and updates on several large scale pipeline projects and a merger.  But the highlight was the most successful MLP IPO of all time, on any measure.  SHLX may have felt like they left some money on the table given the huge IPO pop, but on day one Shell saw the value of its retained 71% interest in SHLX grow by $1.0bn, so I think they’ll be ok.
News-of-the-World
Equity

  • Shell Midstream (SHLX) priced IPO of 40.0mm units at $23.00/unit, raising $920mm in gross proceeds (press release)
    • IPO yield of 2.8% ranks as the lowest ever for an MLP
    • IPO size of $920mm ranks as the most ever raised in an MLP IPO
    • SHLX opened at $32.00, and closed at $33.55, up 45.8% in its first session, the biggest 1 day IPO pop for an MLP ever
    • Offering upsized from 37.5mm units originally offered
    • Below is a list of the 10 lowest MLP IPO yields ever. All have come in the last 16 months

Lowest Yields

  • Below is an updated list of biggest MLP IPO pops, 5 of which have happened in 2014.

IPO Pops_10-29
 

  • Western Gas (WES) prices public offering of 7.5mm units at $70.85/unit, raising $531.4mm in gross proceeds (press release)
    • Overnight offering, priced at 3.1% discount to prior closing price
  • Tallgrass Energy (TEP) files equity distribution agreement to sell up to $200mm of common units at the market (filing)
  • Enviva Partners (EVA) filed for $100mm IPO (filing)
    • Riverstone-sponsored wood pellet production MLP
    • $60.5mm of EBITDA
    • Full IDRs with 50% top tier

M&A / Growth Projects

  • Western Gas (WES) announced the acquisition of Nuevo Midstream for $1.5bn (press release)
    • Nuevo’s assets include an existing 300 mmcf/d natural gas processing plant, a 400 mmcf/d processing plant under construction, and other gathering infrastructure in the Delaware Basin
    • WES announced that to partially finance the acquisition it will issue $750mm of Class C units to Anadarko. Class C units will receive distributions in the form of additional Class C units and the units will not be subject to IDR payments until they are converted to common units
    • WES indicated that the purchase price represents an 8.5x multiple of 2016 EBITDA
    • As a result of a JV arrangement between Anadarko and another midstream operator, WES will offer 50% of the acquisition to that midstream operator, who will have 30 days to respond and another 30 days to pay for their 50%
  • Energy Transfer (ETP) announced Phillips 66 will be a joint venture partner on development of Bakken Shale crude oil pipelines (press release)
    • ETP will own 75% and Phillips 66 will own 25% of two large scale crude oil pipeline projects (Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline) that will provide producers in the Bakken shale with access to markets in the Midwest and in Texas Gulf Coast area
  • ONEOK Partners (OKS) announced $800mm acquisition of Natural Gas Liquids pipeline assets from Chevron (press release)
    • OKS will acquire 80% interest in West Texas LPG Pipeline and 100% interest in the Mesquite Pipeline, which gather and transport NGLs from the Permian Basin to East Texas and Mt. Belvieu
  • Magellan Midstream (MMP) announces sufficient commitments to proceed with Saddlehorn Pipeline project (press release)
    • MMP announced commitments from Anadarko and Noble Energy
    • MMP also announced letters of intent with Anadarko and Saddle Butte Pipeline for potential equity investments in the pipeline
  • Breitburn Energy Partners (BBEP) announces $122.7mm acquisition of properties in the Midland Basin (press release)
    • Properties purchased from Antares Energy are adjacent to BBEP’s properties in Howard County
    • Financed with $50mm in cash and 4.3mm units issued to Antares
  • Williams Partners (WPZ) and Access Midstream (ACMP) announced merger agreement with updated terms from initial proposal (press release)
    • WPZ will merger with ACMP in a unit-for-unit exchange at a ratio of 0.86672 ACMP common units per WPZ unit
    • ACMP unitholders will receive an additional 6.3mm new common units prior to the merger
    • The net effect of these terms is that WPZ and ACMP are getting a better deal, at the expense of WMB
    • Merger is expected to close in early 2015
  • MPLX announced that parent MPC has offered to drop down remaining 31% of Pipe Line Holdings to MPLX (press release)
    • This drop down was announced as part of its 3Q results release, which also included a plan to accelerate distribution growth
  • Energy Transfer (ETP) announced that its ET Rover Pipeline project is fully subscribed at 3.25 bcf/d (press release)
    • ETP secured 3.25 bcf/d of binding shipper commitments under 15 and 20-year fee-based contracts
    • The 800-mile pipeline is expected to cost $3.8bn to $4.4bn and will transport natural gas from Marcellus Shale supply areas to demand centers in Michigan and in Ontario, Canada, but will also connect with ETP’s Panhandle Eastern Pipeline allowing shippers access to Gulf Coast markets

Other

  • EROC re-instated distribution (of $0.07/unit), announced unit buyback program of up to $100mm (press release)
  • Notable Distribution Increases:
    • ATLS (+6.1%
    • MEP (+3.8%)
    • SRLP (+3.5%)
    • WNRL (+3.4%)
    • ACMP (+3.4%)
    • AHGP (+2.7%)
    • RGP (+2.6%)
    • ARLP (+2.0%)
    • SDLP (+1.8%)
    • EXLP (+1.8%)
    • DPM (+1.7%)
    • APL (+1.6%)
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