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September 17, 2017

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Week Thoughts: MLPs Hit their Macros, See Gains

MLPs crept higher each day this week, before a 0.5% decline Friday limited weekly gains to 1.1%.  MLPs have rallied 3 out of the last 4 weeks, and the Index is up 6.3% off the recent (8/21) bottom.  Oil, natural gas and the broader equity market were all up this week, the stars were aligned, so it would be strange if MLPs didn’t go up.

IPO Entitlements
Suddenly, MLP IPOs are back.  One launched its road show and two others filed initial registration statements.  All four in the backlog have the same traditional MLP structure will full incentive distribution rights (IDR) tiers, which is a disappointment after several recent IDR elimination transactions have clearly highlighted the limitations of the IDR structure.
Given how fierce the competition for fund flows and attention has become among MLPs, you’d think one of the pending MLP IPOs would have taken at least an incremental step towards a more sustainable structure that limits IDRs in some way.
I’m not sure how 3-4 new MLPs added to the universe can be a positive catalyst for the sector, but perhaps it will be if the roadshows highlight activity and value of certain assets that preside outside the Permian.  I guess anything is possible.
Poll Results: Fixer Upper
Investor Confidence Question: Last week’s first question probed your thoughts on re-establishing investor confidence in MLPs.  It would be nice to see all three options come to fruition: solid results over the next few quarters, better capital allocation and showing more management accountability.  So, naturally, the runaway top answer was all of the above at 60% of respondents.
Its less clear whether that means you believe all three are necessary to regain investor confidence, or if the second highest response (23%) of delivering solid results over the next few quarters is enough to regain investor confidence back.
While the sector has become a “show-me” story, what needs to be shown goes beyond just improving results over the next few quarters.  The sector needs to show a clear change in philosophy towards allocating capital.  Lower payout ratios, lower IDR takes and lower leverage needs to accompany recovery in operating results.
Winners & Losers
Beaten down MLPs with leverage to higher oil prices dominated the top 5 on the back of oil price strength.  Not a clear trend among the bottom 5.

NGL’s big week didn’t pull it out of the bottom spot for the year.  USDP had a strong bounce back from last week.  The VTTI buy-in transaction closed this week, so VTTI’s YTD outperformance has been removed from the chart below.

General Partners and U.S. Midstream Corporations
For a second straight week, GPs and U.S. Corps outperformed MLPs, but just marginally.  TEGP rallied hard on the latest new growth project announcement.  ETE was the lone negative performer in the group.

TEGP jumped into the second spot among GPs and corps so far this year.  Like NGL above, SEMG’s rally was not enough to pull SEMG out of the bottom spot in the group.

Canadian Midstream Corporations
Canadian midstream corps were all positive and outperformed this week, attracting some attention with oil prices edging towards $50/bbl.  As usual, the group traded in a relatively tight band.  Modestly negative news for ENB’s Line 3 project and a $7bn shelf registration statement didn’t slow ENB.

ENB is now positive for the year in USD terms, leaving just one Canadian corp with a negative year to date total return.

News of the (MLP) World
IPOs are back, whether you like it or not! That means for me, it’s back to checking all filed S-1s on a daily-basis because you never know when the next MLP will file.  There are now 4 MLP IPOs pending, with 1 on the road.  In other (more consequential) news, midstream companies with strategically located existing assets continue to find ways to leverage those assets into development of new assets (like MMP and TEP this week).
Capital Markets

  • Shell Midstream (SHLX) sold equity via a private placement using its ATM program for a portion of the transaction:
    • 10.37 units at $26.55/unit, raising $275mm in gross proceeds at 2.5% discount to prior closing price (press release)
  • Oasis Midstream Partners (OMP) launched IPO of 7.5mm units with a midpoint price of $20/unit, which would result in $150mm in gross proceeds (filing)
    • 5% implied yield at midpoint, expected to price on 9/20/17
    • Base offering represents 27.3% LP interest in OMP
    • Oasis assets include crude oil gathering and transportation system, natural gas G&P system, and water handling systems
  • BP Midstream Partners (BPMP) filed initial S-1 to raise up to $100mm in MLP IPO (filing)
    • BP midstream assets in the U.S. include approximately 4,630 miles of crude oil, refined products, diluent and natural gas pipeline systems
  • Howard Midstream Partners, LP (HMP) filed initial S-1 to raise up to $200mm in MLP IPO (filing)
    • Howard currently provides natural gas, NGLs, and refined products midstream services to third party customers in South Texas, Northeastern PA, and along the Gulf Coast
  • Debt Offerings:
    • Cheniere Partners (CQP) priced $1.5bn (upsized from $1.0bn) of 5.25% senior notes due 2025 (press release)
    • Tallgrass Energy (TEP) priced $500mm of 5.50% senior notes due 2028 (press release)
    • SemGroup (SEMG) priced offering of $300mm of 7.25% senior notes due 2026 at 98.453% to yield 7.5% (press release)
  • Brookfield Infrastructure Partners (BIP) priced a bought deal offering of 16.6mm units at $42.10/unit (press release)
    • Overnight offering, priced at 4% discount, and traded down 0.7% in the following session
  • Enbridge filed $7bn shelf registration statement (filing)

Growth Projects / M&A

  • Magellan Midstream (MMP) and Valero (VLO) announced a JV to expand the maritime storage facility currently under construction along the Houston Ship Channel in Pasadena, Texas (press release)
    • The facility will include 5mm barrels of storage, truck loading facilities, and two proprietary ship docks
    • MMP’s incremental capex spending will be $75mm, increasing their total to $410mm
    • Expansion is expected to come on-line in early 2020
  • Enable Midstream (ENBL) announced the acquisition of Align Midstream, LLC for $300mm (press release)
    • Align is a G&P operator in the Cotton Valley and Haynesville plays of the Ark-La-Tex Basin
    • ENBL expects the acquisition to be accretive to 2018 DCF/unit and does not expect to access the capital markets in 2017 as a result of the deal
  • Tallgrass Energy (TEP) announced open season to link natural gas on the Cheyenne Connector pipeline from the DJ Basin to the Rockies Express Pipeline (REX) Cheyenne Hub (press release)
    • The Cheyenne Connector has long-term agreements to transport 600 MMcf/d of natural gas with Anadarko (ACP) and DCP Midstream (DCP)
  • Gibson Energy (GEI) announced 1.1mm barrel terminal expansion at Hardisty terminal complex (press release)
    • 600,000 of the expansion is backed by long-term, fixed-fee contracts


  • Star Gas Partners (SGU) announced intention to change its tax status from partnership to corporation for federal income tax purposes (press release)
    • SGU was a prominent propane MLP from IPO in 1995 until it cut its distribution and sold its propane business to Inergy L.P. in 2005
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