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October 11, 2015

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Week Thoughts: MLPs Follow Through with Best Week in 2+ Years

The MLP Index posted a 6.1% gain this week, its best week in more than 2 years, best since the first week of 2013.  Investor fears are tentatively melting away, but they haven’t yet been replaced by greed.  Since the bottom on 9/29, MLPs have been positive 7 out of 8 days, rising 24.1% over that span.  But, the Index would need to rally 46.4% from here to reach 2014 peak levels.
Weekly Review_10-9-15
Last week’s bounce saw money flow into the highly-liquid large cap MLPs in a reversal of negative sector sentiment.  This week saw small cap MLPs catching up (Equal Weight version of Alerian up more than 200 bps more than cap-weighted AMZ).  That’s what you would expect to happen when the market is in the later stages of stabilizing.  Maybe next we’ll see further differentiation based on fundamentals, just in time for earnings season, which kicks off with KMI this upcoming week.
While MLPs have bounced, most analysts are calling for more volatility through year-end, based on still looming headwinds, whether its equity issuance, the old standby “tax-loss selling”, oil fundamentals and seasonal refinery slowdown, E&P borrowing base, or the potential lack of clarity on 2016 expectations during 3Q earnings.  Despite those headwinds, MLPs have popped back above their 50-day moving average and held that level late this week, which is generally a good sign if you put stock into such things.
Winners & Losers
Week after week in the charts below, we pull from a database of around 100 MLPs that are (a) paying a distribution and (b) are not variable distribution MLPs (i.e. they are committed to trying to continue to pay flat or increasing distributions).  Of all of those MLPs, amazingly only two were negative this week: WPZ and PAA.  On the upside, upstream and small cap MLPs with commodity prices led the way.  Not pictured below, gathering & processing MLPs were particularly strong performers this week (AM +21.5%, , MEP +19.1%, SMLP +18.5%).
MMLP fell out of the top 5 this week, replaced by USAC.  On the downside, now that CEQP has completed its merger with CMLP, CEQP is now included in the bottom 5.
General Partner Holding Companies
GPs of midstream MLPs were universally higher this week, and the group outpaced the MLP Index after trailing last week.  EXH’s separation transaction appears to be moving forward, which sent EXH higher this week.  Targa updated guidance this week proved to be a positive for TRGP more so than for NGLS, as NGLS appear to be sacrificing coverage to maintain TRGP growth, and that was reflected in TRGP stock this week.  CPGX and EQGP bounced back after last week’s declines.
News of the (MLP) World
Light MLP news week.  Distribution announcements are starting to trickle in, and small growth capital projects on the processing side continue to get announced, but more often in JVs with producers these days.  There was a preferred deal that went well.  Also, there are reports of ETE/WMB/WPZ plans to sell WPZ’s 50% stake in a major natural gas pipeline that runs under the Gulf Coast to Florida.
Capital Markets

  • Targa Resources (NGLS) priced offering of 4.4mm Series A fixed-to-floating preferred units at $25/unit, raising $110mm in gross proceeds (press release)
    • The units will pay a 9% distribution per year through 2020, and thereafter will pay LIBOR plus a 7.71% spread
    • Redeemable starting five years from now at $25/unit
    • The transaction was successfully marketed with substantial interest beyond the original offer of around $75mm
    • Given the success of this transaction and the challenges of the traditional equity capital market, expect more midstream MLPs to pursue similar transactions going forward

M&A / Growth Projects

  • Exterran Holdings (EXH), sponsor of MLP Exterran Partners (EXLP) announced financing to enable previously-announced spin-off of international services and global fabrication business (press release)
    • EXH has secured financing with Exterran Corporation and Archrock, Inc. that enables EXH to move forward with its previously announced separation transaction, now slated to occur in 4Q15
    • The separation transaction will separate the international and fabrication operations from U.S. compression assets, leaving EXH as the pure-play general partner holding company of EXLP
    • EXH will be renamed Archrock, Inc. post spin-off
  • Rice Energy (RICE), sponsor of MLP Rice Midstream Partners (RMP), announced midstream joint venture in Utica Shale with Gulfport (press release)
    • Gulfport and RICE will jointly develop natural gas gathering and water services assets to support Gulfport’s dry gas Utica Shale development
    • JV will be supported by long-term, fee-based service agreements with Gulfport
    • RICE will own 75% of the JV and will operate the assets
  • Targa Resources (NGLS) announced joint venture agreement with Sanchez Energy Corp to construct a 200 mmcf/d processing plant and 45 miles of pipeline in South Texas (press release)
    • NGLS expects to contribute $125mm for their 50% ownership interest in the plant and pipeline assets, both expected to be in-service by early 2017 and to be supported by long-term fee-based contracts
  • Bloomberg reports Williams Companies (WMB) is planning to sell 50% stake in Gulfstream pipeline (Bloomberg)
    • Williams Partners (WPZ) is the actual owner of the 50% interest in Gulfstream, with the other 50% owned by Spectra Energy Partners (SEP)
    • The sale would likely be required in order to satisfy FTC requirements for the merger between ETE and WMB
    • Spectra was mentioned as a potential buyer, but hard to see how they make it work from FTC perspective, given Sabal Trail and the other 50% of Gulfstrea already

Distributions / Other

  • House approves repeal of oil export ban, Senate approval and Obama veto still loom as major roadblocks
  • Distribution announcements
    • GEL (+2.4% quarter over quarter), PAA (+0.7%), PAGP (+1.8%), TEGP (+8.3%), TEP (+3.4%) announced distribution increases
    • LINE/LNCO suspend distributions officially
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