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August 31, 2014

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Week Thoughts: MLPs in Mid-Season Form

The MLP Index was up each day this week, and 2.3% overall, capping a record-setting August with a fourth straight positive week.  In total, the MLP Index produced 8.1% total return in August, the best August on record for the MLP Index.  This came after the worst July ever for the index at -3.6%.  In case the extremes continue into September, the worst September ever was 2008 (-17.2%), while the best was 2000 (+9.1%), FYI.
Weekly MLP Review_8-29-14
MLP returns were well ahead of the S&P 500 (+0.7%) and utilities (+1.7%) this week.  Commodity prices recovered across the board, with oil up 2.4% and natural gas front month futures breaking through $4.00/mcf (+5.0% week over week).
The MLP Index yield hit a fresh all-time low of 5.14% on Friday.  With the US 10 year down to 2.34%, the MLP Index spread is 280 basis points, much wider than the all-time low spread of 42 basis points (on 7/15/07), but inside of the 15 year average of 320 basis points.
With the NFL (and fantasy football) season kicking off this week, we are likely to hear at least one announcer use the phrase “mid-season form” to describe a player or team that performs well this week.  That phrase came to mind when thinking about recent MLP dealmaking and price performance as we head into the fall capital markets season.
It will be interesting to see if we look back on this recent outperformance as MLPs “peaking too soon”, to borrow another sports phrase.  The MLP Index made a new all-time peak value each of the 5 days this week, bringing the total to 49 new peak days this year, compared with 40 for all of last year.
Big Months
Since 2001, there have only been 6 months of performance higher than 8.1%, and 4 of those came in 2009.  The next month’s return following such massive months are mixed, but 3 of the last 4 occurrences saw negative returns in the following month.  The last 3 times the index was up 8.1%+ in a month, it happened in the month prior to distribution payments (which is historically strong) and the next months are typically weak. This time is different, coming ahead of a seasonally strong month (September).  So, while you would expect some kind of let down following such strength, we are entering a time period that the last 5 years has seen strength relative to the summer months.
Big Months
Winners & Losers
The analyst quiet period ended this week for VTTI and RIGP, and analysts’ positive commentary sent those stock much higher this week.  Other than that, there was little news that showed up on the top 5 and bottom 5 this week.  DKL saw some selling after its 15.4% week last week, but DKL still finished with a remarkable 26.6% total return in August.  As shown below, that was only the 3rd best total return in the sector in August.
Incredibly, KMP’s 19% return for the month put it 7th on the list of MLP total returns for the month, behind all 5 of the names below, and GSJK as well.  If you remove KMP and EPB from the Alerian Index and run the weighted average return of what’s left (based on the Alerian weights), you get 6.9%.  So, KMP and EPB added 1.2% to the MLP Index return this month.  A simple average of August returns for all  MLPs I track excluding KMP and EPB (93 MLPs) is 7.2%, compared with 7.5% with them.  Basically any way you slice it, MLPs had an amazing month.
Upstream MLPs MCEP, EROC and VNR made the bottom 5 for the month, which was likely the result of weak natural gas prices in August.
Year to date, EQM broke back into the top 5 this week, displacing GLOP.  On the downside, CMLP’s strength this week moved it out of the bottom 5, with MMLP taking its place.  Of note, variable distribution MLP EMES has seen total return of around 225% so far this year.  I don’t put variable distribution MLPs on these charts, because they tend to be more volatile than the traditional MLPs with MQDs.
News of the (MLP) World
There were no new M&A deals announced in the MLP space this week, although there were two additional MLPs added to the queue of filed IPOs.

  • USD Partners LP (USDP) files S-1 to raise up to $150mm of gross proceeds in an MLP IPO (filing)
    • USDP was formed by US Development Group, LLC to develop, acquire and operate energy-related rail terminals
    • Initial assets consist primarily of an origination crude-by-rail terminal in Hardisty, Canada and two destination unit train-capable ethanol rail terminals in San Antonio, TX and West Colton, CA
    • Projected next 12 months EBITDA of $38.7mm, with the Hardisty terminal accounting for more than 90% of EBITDA
    • Has full IDRs with a top tier of 50%
  • Cone Midstream Partners (CNNX) files S-1 to raise up to $350mm in an MLP IPO (filing)
    • CNNX was formed by CONSOL Energy, Inc. and Noble Energy, Inc.
    • Initial assets include gathering assets supporting production of both sponsor entities, supported by fee-based, 20 year contracts covering 100% of revenue
    • Next 12 months EBITDA for CNNX is projected to be $67.4mm
    • Has full IDRs with a top tier of 50%
  • Western Gas (WES) files S-3 to register up to $500mm of common units (filing)
  • Atlas Resource (ARP) files equity distribution agreement to sell up to $100mm of common units at-the-market (filing)
  • Boardwalk Pipeline (BWP) priced a large block trade of 1.1mm units at $19.75/unit, according to Factset, raising $21.7mm

M&A / Growth

  • Kinder Morgan (KMI) announces receipt of early termination of the waiting period under the Hart Scott Rodino Anti-Trust Act for its acquisition of KMP and EPB (press release)
    • Given the common control of all of these entities under the KMI umbrella, this isn’t a surprising announcement, the voting process is the much bigger and longer lead-time hurdle to the $70bn deal closing


  • The Department of Treasury and the IRS issued its 2014-2015 Priority Guidance Plan that provides a list of intended goals for the entities over the next 12 months (PDF here)
    • On pages 21-22, the document discussing publicly-traded partnership and indicates the intention of these government bodies to address the pause in private letter ruling issuance with formal guidance
    • Questions remains as to what the form and the timing of the guidance will be, but its on the to do list
  • Constellation Energy Partners LLC (CEP) announces board approval of a plan to convert to a limited partnership called Sanchez Production Partners (press release)
    • The general partner of the new MLP will be owned by Sanchez Oil & Gas (NYSE: SOG)
    • The proposed conversion will require unitholder approval as well
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