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January 26, 2014

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Week Thoughts: MLPs Heat Up in Sub-Zero Market

MLPs were one of the few bright spots in the market this week, with a 1.5% gain for the Alerian MLP Index compared with a 2.6% loss for the S&P 500.  The recipe for big MLP out-performance: sell-off in global equity markets, lower interest rates, colder than expected temperatures leading to spiking commodity prices, and a general lack of MLP equity issuance.

Weekly MLP Review_1-24-14

MLP index returns are now well ahead of the S&P 500 year to date, after trailing heading into the week.  The Alerian MLP Index was up slightly more than the Alerian MLP Equal Weight Index, implying strength in large cap MLPs.  MLP affiliate corporations (SEMG, WMB, KMI, PAGP, TRGP, XTXI and OKE) were almost universally down (XTXI was the exception), which I believe to be a function of their corporate status that makes them more broadly owned (given their lack of K-1) and more susceptible to broad market declines.
Spiking natural gas price was the big story this week, given the relentless winter weather hitting all around the U.S. to various degrees.  Short term supplies have not been able to keep up with peaking demand, driving the spot price for natural gas priced at Henry Hub on Thursday to more than $5.50/mmbtu, a level not reached since February 2010.   Week over week, the change was 19.3% for natural gas.  Below is a chart of natural gas prices over the last 6 months.
Natural Gas Spot Price_Last 6 Months
Natural gas prices have trended higher throughout this extremely cold winter, and may begin to positively impact 2014 guidance for some MLPs that benefit from higher natural gas prices (upstream MLPs and MLPs with gathering assets in dry gas areas most directly), although gains from natural gas pricing and activity may be balanced against operational disruptions due to extreme winter weather for some MLP assets.
Ethane and propane continue to be in shorter supply as well, which has led their prices to multi-year highs.  The Mt. Belvieu price for these lighter NGLs doesn’t capture some of the extremes at the margin, however. In some areas, propane was delivered to retail customers at nearly $5.00/gallon, and in some cases it was not delivered at all (according to this Reuters story).
Equity Issuance YTD
I mentioned above that there has been a lack of equity issuance.  Below is a chart showing the amount of equity issued in the first 24 days of each of the last 5 years.  So far in 2014, MLP equity issuance in marketed offerings is well behind the pace of the last four years, which averaged $1.6bn through January 24th.  So far, there has been 1 small IPO (CELP), 1 small primary equity offering (from AMID – see below), and a secondary offering (ETP selling APU units).
Equity Offerings YTD
The chart above doesn’t capture how much equity has been issued via at-the-market equity distribution arrangements (ATMs) that have become more common among MLPs in recent years. But even assuming a liberal amount of equity issued via ATMs, equity issuance has been light, which can be both good and bad.  A lack of equity deals means that on a day-to-day basis there is less selling pressure, which is good for MLP prices generally.  On the other hand, if the assumption is that the MLP sector needs to issue at least $20bn in equity in 2014 to fund capital programs, each day they don’t issue equity increases the overhang from expected equity for the remaining days of the year.
Winners & Losers
The range of returns among MLPs was pretty tight this week.  EVEP led all MLPs higher this week at 6.1%, while NMM was down the most at 4.2%.  EVEP’s strength may have been the result of commodity price strength.  Last week’s biggest loser, DKL, bounced back into the top 5 this week.  The three pure-play contract compression MLPs made the chart below, with GSJK and EXLP in the top 5 and USAC in the bottom 5.  GSJK and USAC both announced distribution increases that seemed to be larger than expected.  AMID was the only MLP that announced a transaction (not counting the 40+ MLPs that announced distributions this week), and pressure from its equity offering seemed to push down its price late in the week.


For the year so far, EPB and APL climbed out of the bottom five this week, replaced by RRMS and CMLP.  No change to the early leaders among MLPs year-to-date.  


News of the (MLP) World
It was a very light news week for MLPs, with just a single acquisition and a related equity offering, and a bunch of distribution announcements.  In the upcoming week, the analyst community will be focused on digesting whatever news comes out of the Kinder Morgan analyst day.  According to our poll question last week, most of you believe either that the analyst day announcements will (1) not meaningfully impact any of the Kinder Morgan-related stocks or (2) that they will have an impact on KMI above any of the MLPs.  We’ll get to see how that plays out this week, and we’ll also see another round of distribution announcements that may drive individual MLP performance.



  • American Midstream (AMID) prices public offering of 3.4mm common units at $26.75/unit, raising $91.0mm in gross proceeds (press release)
    • One day marketed offering, file-to-price decline of 4.0%

M&A / Growth Projects

  • American Midstream (AMID) announces $100mm acquisition of natural gas gathering system in Eagle Ford Shale (press release)
    • AMID to acquire 120-mile natural gas gathering and re-delivery system located in the oil window of the Eagle Ford shale
    • In December, Penn Virginia Corporation (PVA) agreed to sell the assets to an affiliate of AMID’s general partner
    • AMID will acquire the entity that has the agreement with PVA for $100mm
    • PVA will dedicate for 25 years all current and future natural gas production from the areas around the system to AMID
    • AMID expects the assets to generate $8mm of EBITDA in 2014 (12.5x EBITDA multiple)
      • Additional capex of $60-$70mm to be spent in the next 5 years to increase annual EBITDA to $25mm ($165mm of acquisition cost and capital implies a 6.6x multiple of 2018 EBITDA)


  • Increases:
    • XTXI: $0.15, +15.4%
    • WGP: $0.23125, +8.2%
    • EQM: $0.46, +7.0%
    • XTEX: $0.36, +5.9%
    • PSXP: $0.2248, +5.8%
    • OILT: $0.47, +5.6%
    • USAC: $0.48, +4.3%
    • SMLP: $0.48, +4.3%
    • TLLP: $0.565, +3.7%
    • WES: $0.60, +3.4%
    • BKEP: $0.1265, +3.3%
    • RRMS: $0.465, +3.3%
    • DKL: $0.415, +2.5%
    • GLP: $0.6125, +2.1%
    • CEQP: $0.1375, +1.9%
    • GSJK: $0.4375, +1.7%
    • CMLP: $0.41, +1.5%
    • HEP: $0.50, +1.5%
    • MWE: $0.86, +1.2%
    • LGCY: $0.59, +0.9%
    • MMLP: $0.785, +0.3%
  • Flat:
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