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December 9, 2012

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Week Thoughts: MLPs Going the Wrong Way

The Alerian MLP Index was down 3.0% this week, its worst weekly drop since May of this year when MLPs dropped 5.3% in a week.  That week in May, the broader market sold off (S&P 500 was down 4.2% that week).  This week, however, the broader market (here measured by the S&P 500), despite bouncing around earlier in the week, finished up slightly on the positive jobs report released Friday.   So, MLPs under-performed the market by 3.15% this week.  That large an under-performance in a week hasn’t happened since March of this year, but it hasn’t happened twice in a year since 2008.

Its been a wild ride for MLPs since the election, but until this week, MLPs and the market were moving in lockstep.

It happens periodically with MLPs where the stock market will rally over a day or two and the MLP reaction is delayed for whatever reason.   This year however, those gaps haven’t closed and the big under-performance weeks have helped the S&P 500 build an insurmountable lead on the MLP Index throughout 2012, which now stands at more than 1000 basis points.

This week’s price action for MLPs probably had something to do with the $951.8mm of equity issuance across 4 equity offerings (more than $1bn counting the overallotment options on those deals).  Follow-on offerings keep coming and they keep struggling in the aftermarket, even with a 1 day marketing effort like we’ve seen many more of lately (as opposed to overnight offerings).  The few bright spots are recent IPOs (MPLX +4.4% this week) and freshly priced IPOs (WGP popped 27.3% on its first trading day).
Also impacting MLPs of late has to be the continued deterioration of NGL prices, particularly Mt. Belvieu ethane, which reached a fresh low on Thursday, and finished the week down 10% again, and a staggering 71% year to date.  See the chart below for an indexed chart of the MLP Index total return (green), ethane price (white) and propane price (orange).  WTI oil was also down 3.4% this week.

Whatever the reason, MLPs are going the wrong way.  Since my wife has started a book selling crusade around Austin at various holiday bazaars, lately on weekends I am finding myself babysitting my 3 kids (all under 6 years old) on my own.  And while we (my wife) don’t let them watch TV or movies more than an hour a week, when I am in charge we sometimes fire up the Nintendo Wii, so the kids can watch me relive my youth of playing Super Mario 3.  This weekend, we played some Mario Kart.  When I let them try a race, they inevitably end up going the wrong way.  When that happens, there is a helpful little turtle in a cloud that floats in to let them know they are going the wrong way.

MLPs are going the wrong way and will need some help going forward.  They need a star, some red turtle shells, and mushrooms to get back into the race.  Oil and NGL price increases, a slowdown in MLP equity issuance, and tax regulation certainty would probably work too.  Not sure if we’ll get any of that for Christmas, but the lump of coal we’ve been forced to eat the last month is not cool.
 
Winners & Losers
QRE and MEMP were down on their equity offerings this week.  The market knew the MEMP deal was coming, given the MLP had to file an S-1 prior to launching its equity offering because it went public less than a year ago.  But it was up 7.4% last week to lead all MLPs.  This was the first equity deal for MEMP since its IPO, and therefore represented more than 100% of the MLP’s public float.  Oh, and it was executed with a 1 day marketing period (as opposed to the overnight deals we saw almost exclusively for the last few years until August of this year).  So, it was going to be a tough deal regardless, but pricing in the shadow of WGP and a weak commodity price week didn’t help either QRE or MEMP.  WPZ was the largest MLP on the loser list this week, down on weak NGL prices that may lead to another quarter of unusually low distribution coverage.
Only one MLP was up more than 2% this week: MPLX, which has been on fire the last few weeks (up 7% last week).  The chart below doesn’t include GPs or variable distribution MLPs, but its worth noting that 2 GPs, WGP (as mentioned above) was up 27.3%, ETE was up 3.6% , and 3 variable distribution MLPs (ALDW +11.7%, PDH +4.0%, and NTI +2.1%) were bright spots as well this week.

Coal MLPs remain the worst performing MLPs year to date, while the top 5 is a mixed bag.

That’s it for this week, but I expect to write a full postmortem on the WGP IPO and what it could mean for future large integrated energy companies and their general view that launching a successful MLP doesn’t move the needle.  WGP’s GP stake (not counting the LP stake), which is ultimately owned by Anadarko Petroleum (APC), is valued at more than $2 billion.  That is value, created in 4.5 years, that would not have existed without the creation of the WES MLP and the magic of incentive distribution rights.
News of the (MLP) World

Very active week in equity, M&A and debt this week…
Equity            

  • QR Energy (QRE) prices public offering of 12.0mm common units at $16.24/unit, raising $194.8mm in gross proceeds
    • Overnight offering priced at 3.97% discount to prior close
  • Western Gas Equity (WGP) prices upsized initial public offering of 17.1mm common units at $22.00/unit, raising $376.2mm in gross proceeds
    • Offering upsized 14%
    • Priced above the range at $22.00/unit (3.0% yield, second lowest ever), opened at $27.00/unit closed at $28.00/unit, increase of 27.3%
    • Current yield: 2.36%
    • Net proceeds will be used to purchase 7.58mm units of subsidiary Western Gas (WES) at $46.00 per unit
  • Memorial Production (MEMP) prices public offering of 10.5mm common units at $17.00/unit, raising $178.5mm in gross proceeds
    • 1 day book build, file to price decline of 5.87%
  • Atlas Pipeline (APL) prices public offering of 9.75mm common units at $31.00/unit, raising $302.3mm in gross proceeds
    • 1 day book build, file to price decline 1.7%, which shows that offerings can trade well when accompanied by accretive acquisitions

Debt

  • Atlas Pipeline (APL) prices $175mm of 6.625% senior notes due 2020 at 103% of par, yield to maturity of 6.003%
  • Targa Resources (NGLS) prices $200mm private placement of 5.25% senior notes due 2023 at 101% of par, yield to maturity of 5.093%

M&A / Growth Projects

  • Enbridge Energy Partners (EEP) announces plans to invest $3.4bn in a Light Oil Market Access Program (press release)
  • DCP Midstream (DPM) announces construction of new 200mmcf/d processing plant serving the Eagle Ford Shale
  • Plains All American Pipeline (PAA) announces $500mm acquisition of crude oil rail terminals from U.S. Development Group (press release)
  • Teekay LNG (TGP) announces 50/50 joint venture with Exmer NV to focus on midsize gas carriers, TGP to invest $140mm (press release)
  • Lehigh Gas (LGP) announces $29mm acquisition of 24 gas stations from Dunmore Oil Company and Jojo Oil Company
  • Atlas Pipeline (APL) announces $600mm acquisition of Cardinal Midstream (press release)
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