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November 12, 2012

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Week Thoughts: MLPs in a (Land)Slide

The MLP Index was down 2.6% this week including distributions.  MLPs have been sliding since around October 5th, down 4 out of the last 5 weeks, and the one positive week was actually negative without distributions.  The Alerian MLP Total Return Index hit its latest all time high on October 17th, and is now 4.3% off that high since.

Distribution ex-dates, the never ending IPO parade (another variable distribution MLP IPO pricing next Monday – Alon USA) and renewed concerns on the economy through earnings season seem to be weighing on the sector.  But, MLPs are holding up better than the broader stock market, with the S&P 500 total return index is down 5.4% since October 17th, and is down 5.6% from its peak on September 14th.
So, in a landslide Obama victory, the market and MLPs are both sliding, we’ll see how long.   The most disappointing thing about the election outcome is that it appears we are back to a high correlation, Fed and congress-watching market, with big swings based on the fears of the looming fiscal cliff and hopes that the market somehow has a Federal Reserve-branded bungee cord to tied to its feet.
Earnings Takeaways
Its hard to generalize in an increasingly complex MLP sector, but I’ll try.  Generally, high quality crude-focused MLPs remain well positioned in today’s environment.  PAA, SXL, GEL all had solid results and positive guidance for 2013.  MMP didn’t fare as well this quarter, but reiterated its positive crude-focused outlook.
For gathering and processing subset of MLPs, there is a race to shift all processing exposure to fee-based, but this quarter shows most MLPs aren’t there yet.  MWE, WPZ, NGLS, RGP and other MLPs with similar assets were plagued by lower NGL prices and lower margins for NGL related activities.
EPD and OKS were notable exceptions.  Those two posted solid results in the face of lower NGL prices, testaments to the position of their assets in the value chain (for OKS in particular) and to the higher percentage of fee-based income they have relative to peers.
The upstream MLPs were also impacted by lower NGL realizations, surprising LINE and QRE investors in particular.  The upstream MLPs are still benefiting from a robust acquisition market, happy to buy mature producing properties at 5-7x EBITDA.  It was LGCY’s turn this week.  Opportunity set is as big as its ever been for the upstream MLPs, and they are taking turns announcing large, accretive acquisitions.
But, like I said, with earnings behind us, the driver of MLP returns will be fund flows into the broader market, likely driven by daily headlines out of Washington through the end of the year, as we get pushed off this fiscal cliff…

News of the (MLP) World
Equity – 2 follow ons, 2 ATM agreements, 2 private placements, 1 GP IPO filing, 1 IPO launch

  • 11/9: PVR Partners (PVR) prices public offering of 6.5mm common units at $23.11/unit, raising $150.2mm in gross proceeds (press release)
    • 3.67% discount to prior close, closed first trading session at $23.51, +1.7% from issue price
  • 11/9: Alon USA (ALDW) launches IPO of 10.0mm common units (latest S-1)
    • Price range of $19.00 to $21.00
    • Projected 12 month distribution of $5.20 / unit, which would be a 12 month yield of 26%, which would be the highest yield ever for an MLP, doubt it prices there though
  • 11/8: Legacy Reserves (LGCY) prices public offering of 8.7mm common units at $24.80/unit, raising $215.8mm in gross proceeds (press release)
    • One day book build, with decline of 8.4% from announcement to pricing
    • Proceeds to partially fund acquisition of properties from Concho Resources
  • 11/7: Markwest Energy (MWE) files equity distribution agreement to sell up to $600.0mm in common units at the market (filing)
  • 11/7: Plains All American (PAA) files updated equity distribution agreement to sell up to $336.1mm in common units at the market (filing)
    • Originally filed $500mm ATM in September, have sold $163.9mm since
  • 11/7: Golar LNG (GMLP) issues 1.5mm units in private placement to Golar LNG Limited at $30.50/unit, raising $46.4mm in gross proceeds
  • 11/5: Western Gas Equity (WGP), GP of Western Gas (WES), files initial S-1 for IPO to raise up to $362.3mm in gross proceeds (filing)
    • Would be first GP IPO since February 2011 (KMI)
    • Would be first GP IPO structured as a partnership since Penn Virginia’s GP in December 2006, because TRGP and KMI are corporations
  • 11/5: Inergy Midstream (NRGM) announces private placement of $225mm of common units to institutional investors


  • 11/9: Legacy Reserves (LGCY) launches $300mm offering of senior notes due 2020 (press release)
  • 11/8: Crestwood Midstream (CMLP) prices $150mm add-on private placement of 7.75% senior notes due 2019 (press release)

M&A / Growth Projects – Very active week

  • 11/8: NuStar Energy (NS) announces acquisition of crude pipeline, gathering and storage assets and NGL assets in Eagle Ford Shale for $425mm from TexStar Midstream (press release)
    • Acquisition will close in two separate transactions (crude assets in December, NGL assets in 1Q 2013), funded with combination of credit facility borrowings and junior subordinated borrowings
    • Crude assets include a crude pipeline system consisting of 140 miles of crude transmission and gathering lines (with 100,000 bbls/day capacity), and five storage terminals with combined capacity of 643,400 barrels
    • NGL assets consist of a 38-mile Y-grade NGL pipeline that runs from Pettus to Refugio, TX, and two fractionators that have a combined capacity of 57,000 bbls/day
    • NS also announced the initiation of a sale process for its San Antonio refinery and related terminal
  • 11/7: Legacy Reserves (LGCY) announces acquisition of Permian Basin oil and natural gas properties from Concho Resources for $520mm (press release)
    • Acquisition includes proved reserves of 25.6mmboe (62% oil), 5,238 boed of production, with reserve life of 13.4 years
    • 100% of reserves located in counties where LGCY has operations, 99.8% in the Permian Basin
    • Acreage associated with the acquisition includes 236 identified development locations
    • 2013 estimated cash flow from operations from the acquisition of approximately $80mm
    • LGCY to fund the acquisition with equity proceeds from its $215.8mm equity issuance this week and $300mm senior notes offering launched this week
  • 11/7: Markwest Energy (MWE) announces expansion of its Mobley Processing Complex
  • 11/6: Markwest Energy (MWE) announces agreement with Antero Resources to construct midstream infrastructure in the Utica Shale
  • 11/5: Inergy Midstream (NRGM) announces acquisition of Rangeland Energy, LLC for $425mm (press release)
    • Rangeland owns the COLT crude oil rail terminal, storage, and pipeline facilities (the COLT Hub)
    • COLT Hub is located near the town of Epping in Williams County, ND
    • Assets include 720,000 barrels of crude oil storage and two 8,700 foot rail loops
    • COLT Hub can accommodate 120-car unit trains and is capable of moving more than 120,000 barrels / day by rail
    • Acquisition to be partially financed by a $225mm private placement of common units with institutional investors
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