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June 15, 2014

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Week Thoughts: MLPs Hold Up

MLPs stumbled this week (Alerian MLP Index: -0.3%), tripped up by weakness in the broader stock market (S&P 500: -0.7%) and utilities (UTY: -1.5%).  Midstream MLPs (particularly high growth ones) were hit harder than others in the index (Cushing 30 MLP Index – equal weight and limited to midstream MLPs – was down 1.5%), while upstream MLPs outperformed, helped by oil prices inflated from the latest situation in Iraq.

Weekly MLP Review_6-13-14

The last few weeks (until this week), a general lack of MLP news helped continue a steady upward trend for the sector.  In the weak trading environment this week, it was MLPs with positive news announcements that were able to outperform, including OILT, EQM, NGL, SMLP.
And (no surprise) MLPs that were announced as MLP index additions outperformed on Friday, especially EQM, which was added to the AMZI index (tracked by the largest MLP ETF).
Poll Question: Loco for Yieldco’s
Yieldco’s are all the rage in the utilities space these days.  Unlike MLPs, yieldco’s are one of those “I know it when I see it” things, like pornography or a sports dynasty.  The basic parameters for yieldco’s:  corporations (or partnerships taxed as corporations) that own renewable utility assets, pay a high dividend yield, and have a big pool of NOLs to reduce tax liability for the entities.  What distinguishes them from other utilities is each one’s stated intention to be a yieldco, to have a high payout ratio, to operate a contracted portfolio of utility assets, and to grow through a series of acquisitions.
In the last 12 months, we’ve had three clear cases of yieldco’s, including the latest one (Abengoa Yield – ABY) that priced its IPO this week.  ABY priced above its IPO range, and closed its first trading day up 27.6%.  It was a very strong IPO in a week that saw stocks, utilities and MLPs sell off for the first time in a while.  Below is a chart with some info on the recent yieldco’s.
In addition to these yieldco’s, a few others have filed and talked about filing for yieldco IPOs, including NextEra Energy Partners and TerraForm Power (SunEdison).
The yieldco trend is set to continue.  The market seems to like it, and from what I can tell, the breakdown of buyers includes some MLP investors, but also utility and income investors who have looked at MLPs longingly and now have a faux-MLP group of companies to gorge themselves on.  My question below attempts to gauge how much you MLP-focused readers care about yieldco’s. Sorry, there are no polls available at the moment.  
Winners & Losers
SXE beat all other MLPs by a bunch this week after announcing a transformative transaction with TexStar.  High growth MLPs that avoided a draw down this week included EQM, announced open season for a new pipeline project and was added to the AMZI index, and OILT, which  announced a new growth project.
On the downside, TLP gets a new, likely much more aggressive, general partner and it sells off hard, down 9.8% this week.  The acquirer, NGL, traded up on deal announcement and further as analysts blessed it as a good deal. Perhaps the expectation for TLP’s sale process was that the buyer (whoever it ended up being) would be buying out all TLP units at some premium rather than just taking control of the MLP via a transaction at the G.P. level.  APU was down on the secondary sale of units owned by ETE.
EQM made the top 5 for the second straight week, no other repeats in the top or bottom 5 week over week.
OILT and GLOP moved into the top 5 for YTD returns, displacing TLLP and SRLP.  No constituent changes among the bottom 5 this week, but of the 3 MLPs to cut distributions this year, NRP jumped up to third worst in front of BWP and EROC.


News of the (MLP) World

  • Dynagas LNG (DLNG) prices public offering of 4.8mm common units at $22.79/unit, raising $109.4mm in gross proceeds (press release)
    • One-day marketed offering, with file-to-price to decline of 6.6%
    • DLNG traded up 2.1% in the trading session following pricing
  • Amerigas (APU) prices public secondary offering of 8.5mm units owned by Energy Transfer Equity (ETE) at $45.80/unit, raising $389.3mm in gross proceeds to the seller (press release)
    • Overnight offering, priced at 3.8% discount to prior close, traded down 2.0% in the next trading session after pricing
  • Foresight Energy Partners (FELP) launches MLP IPO of 17.5mm common units (13.5% L.P. interest) with a midpoint price of $20.00/unit, to raise $350mm of gross proceeds (filing)
    • 6.75% midpoint IPO yield based on minimum quarterly distribution of $0.3375
    • Expected to price June 17th
    • FELP will be by far the largest IPO of a coal MLP ever in terms of gross proceeds raised
    • FELP’s S-1 says FELP is the lowest cost and highest margin thermal coal producer in the U.S.
    • 100% of FELP’s operations are in the Illinois Basin, where the company controls 3bn+ tons of coal
    • FELP is backed by Riverstone (30% of G.P.) and the Cline Group (70% of G.P.)
    • FELP is structured with full incentive distribution rights tiers (up to 50%)
    • FELP will have an enterprise value of $3.9bn at IPO, including $1.3bn of net debt
    • $412.9mm EBITDA projected in next 12 months (per S-1) implies 8.5x EV/EBITDA multiple
    • 1.3x coverage for next 12 months, appropriately higher than most midstream IPOs
  • Viper Energy Partners (VNOM) launches MLP IPO of 5.0mm common units (7% L.P. interest) with a midpoint price of $20.00/unit, to raise $100mm of gross proceeds (filing)
    • IPO is a spin off from Nasdaq-listed Diamondback Energy (FANG), which was 100% owned by Wexford Capital prior to FANG’s IPO in 2012
    • Variable distribution MLP with 1.0x distribution coverage expected
    • Expected distributions of $1.0994/unit in the next 12 months, implying a 5.50% yield
    • $83.8mm EBITDA projected in next 12 months (per S-1) implies 18.2x EV/EBITDA multiple
    • Assets include minerals interests in the Permian Basin, and royalty payments are expected to increase as Diamondback increases production in the region
  • Noble Energy Inc. and Consol Energy form midstream partnership (Cone Gathering) and file midstream MLP registration statement confidentially for MLP IPO (press release)
    • Midstream assets owned by the partnership will provide gathering services for production from the sponsors’ jointly owned acreage in the Marcellus Shale
  • Legacy Reserves (LGCY) prices public offering of 7.0mm 8.0% Series B fixed-to-floating rate cumulative redeemable preferred units at fixed price of $25.00/unit, raising $175.0mm in gross proceeds (press release)

M&A / Growth

  • Bloomberg reports that Williams (WMB) is in late-stage negotiations to acquire the remaining 50% of the G.P. of Access Midstream (ACMP) from Global Infrastructure Partners for $3bn (Bloomberg)
  • NGL Energy (NGL) announces acquisition of Transmontaigne Inc., the G.P. of Transmontaigne Partners (TLP) for $200mm (press release)
    • Acquisition includes 100% of the G.P. & IDRs of TLP, and 19.7% of outstanding L.P. units of TLP
    • Backing out the value of the TLP common units, the G.P. & IDR take was purchased for around $50mm, which implies around a 6.0x multiple for the G.P. & IDR cash flow
    • As mentioned above, interesting trading in TLP implies the market expected more (either a transaction that included a takeout of TLP units owned by the public, or a transaction that provided a new sponsor with drop downs)
  • Southcross Energy (SXE) combines with TexStar Midstream (press release)
    • SXE backed by Charlesbank Capital (original backers of Regency)
    • TexStar backed by EIG Global Energy and Tailwater
    • 3 sponsors will each own around 1/3rd of the GP, with EIG owning the largest portion (36%)
  • EQT Midstream (EQM) and NextEra (NEE) announce JV to build Mountain Valley Pipeline, a large (2 bcf/d) natural gas pipeline that will extend 330 miles south from Wetzel County, WV to Pittsylvania, VA (press release)
  • Oiltanking (OILT) announces $340mm crude terminal expansion in Beaumont (press release)
    • Multi-stage project will have ultimate capacity of 6.2mm bbls
    • Initial phase has been fully committed
    • More details to emerge on OILT’s June 24th analyst day
  • Enterprise Products (EPD) announces location of previously-announced ethane export facility will be the Houston Ship Channel (press release)
    • EPD will build pipeline from Mt. Belvieu to supply the terminal, just like EPD’s propane connectivity from Belvieu to its LPG export terminal at the Houston Ship Channel
  • Summit Midstream (GP/sponsor of SMLP) announces $300mm worth of new Bakken Shale crude, water and gas gathering projects at the GP level (press release)


  • EQM to be added to the Alerian MLP Infrastructure Index (press release)
  • Cushing 30 MLP Index to be rebalanced to equal weights effective post close on June 20th. Additions to index include: CMLP,DPM,  EQM, NGL, PSXP, RGP, SPH. Removed from the index are: AHGP, BPL, CEQP, GEL, MWE, NSH and SEP (press release)
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