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January 14, 2017

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Week Thoughts: MLPs Levering Down

MLPs paused their recent rally in the first full week of trading since before Christmas.  MLPs faced commodity headwinds Monday, and then equity indigestion Tuesday from the first two big midstream equity offerings of 2017 that combined to raise more than $2.3bn.
Still Pulling Levers
MLPs started pulling levers in 2015 when it became clear oil wasn’t going to have a V-shaped recovery.  Those levers continue to be pulled today.  Some were never pulled or weren’t really options.  Before KMI cut its dividend, some thought maybe Rich Kinder would forego distributions on units he owned before cutting dividends to everyone else.  Others speculated that ETE would cut its distribution to support its MLPs or that Kelcy Warren might take a distribution haircut.  Those levers were never pulled, and dividend/distribution cuts have become a more palatable option.
Pulling Levers
The IDR structure has become a problem for the sector, but that problem becomes paralyzing when the IDRs are held within publicly-traded companies.  It used to be that a founder or family or small private group owned the GPs of most MLPs.  Investment bankers, private equity and IPOs changed all that.
The result is MLPs have levers to pull, but the levers become a “Trolley Problem” situation, where pulling a lever to save one group crushes another.
The remaining MLPs that pay 30% or more of their total distributions to their IDRs: SXL/ETP, WES, TEP, OKS, TLLP, PSXP, HEP, EQM.  SEP and DPM are on the cusp as well.  Each one of those has either a pure-play publicly-traded G.P. or an affiliated public company with other assets, or in several cases, they have both.
MLP strategies change with each lever pulled.  KMI, MPLX, PAA, ETP/SXL, and now WMB have all dramatically changed their financial strategies multiple times over the last few years.  They pulled levers one by one, and the resulting changes in strategies are the progression of increasingly dire financial circumstances.
KMI first lowered its growth rate, scaled back capex (after buying Hiland Pipeline), then did a large preferred offering, and finally cut its distribution outright.  PAA issued equity, slowed distribution growth, reduced capex, sold non-core assets, and ultimately swapped out its IDRs for new units and cut its distributions.
WMB got a late start, caught in limbo for almost a year as the ETE merger tromped through leaving carnage in its wake.  But WMB reduced capex, sold assets, and cut its dividend.  Then, after re-vamping its board of directors, swapped out its IDRs for units, issued $1.9bn in common equity and ramped the distribution back up.  It’s hard to keep track.
There remain a few MLPs that have yet to pull all their levers and may still need to. The obvious and easy levers have all been pulled.
Winners & Losers
The winners and losers chart shows some larger MLPs near the bottom and smaller cap MLPs near the top.  No real themes among trading other than that.  There was choppy trading even among MLPs with similar value propositions or sectors this week.  DM was among the worst performers, while other drop-down MLPs like VLP, PSXP and other traded up.  On the chart below one compression MLP was in the top 5 while another was in the bottom 5.  The market continues to sort itself out after analyst upgrades and before earnings season.
YTD Leaderboard
Two weeks in and there is already a wide spread between winners and losers.
Notable that DPM pulled itself out of the hole its strategic transaction put it in last week.
General Partners and Midstream Corporations
WMB was clearly the biggest loser in the sector, dramatically underperforming its MLP (WPZ +3.0%) after its massive equity offering.  ETE also issued equity and found itself near the bottom of the group.  KMI’s latest approval for the Trans Mountain Pipeline expansion has raised expectations heading into earnings next week.  AROC led all GPs and corporations for a second straight week as the market re-discovers the compression business.
News of the (MLP) World
MLP customers continue to trade acreage across hot and cold basins.  This week Parsley, WPX added more acreage in the Permian, and Sanchez teamed with Blackstone to take down APC’s Eagle Ford position.
Second tier basin transactions like Sanchez’s have the potential to add activity to areas with low or no expectations of activity.  Sanchez plans to run 4-5 rigs vs. none planned if APC retained the acreage, adding up to 100+ more wells than expected.  Last year, upstream equity offerings, balance sheet fixes and contract renegotiations drove some MLP performance.  This year, new acreage owners will announce plans to deploy fresh capital that should offer greater visibility for some MLPs.
Capital Markets

  • Williams Companies (WMB) priced public offering of 65.0mm shares at $29.00/unit, raising $1.885bn in gross proceeds (press release)
    • Overnight offering, priced at 9.2% discount to prior closing price, and closed down 1.7% from pricing in the next trading session
    • WMB will use proceeds to fund purchase of $2.0bn worth of WPZ units in a private placement
    • Huge deal, which caused some indigestion across the midstream sector the next day
      • Biggest follow-on equity offering from a U.S. midstream company since WMB issued 53mm shares at $57.00/share in mid-2014 to fund acquisition of GP of ACMP
  • Energy Transfer Equity (ETE) announced private placement of 32.2mm units at $18.00/unit sold to institutional investors, raising $580mm of gross proceeds (press release)
    • ETE will use the proceeds to purchase 15.8mm common units of ETP for $568mm ($35.90/unit)
  • Energy Transfer Partners (ETP) announced pricing of $1.5bn of senior notes (press release), including:
    • $600mn of 4.20% notes due 2027 at 99.786% of par
    • $900mnof 5.30% notes due 2047 at 99.483% of par
  • Kimbell Royalty Partners (KRP) filed initial S-1 to raise up to $100mm in an MLP IPO (filing)
    • KRP is an owner of mineral and royalty interests in 3.7mm gross acres and overriding royalty interests in 0.9mm gross acres
    • KRP will distribute all cash every quarter in a variable distribution format
    • KRP expects to generate $24.9mm in EBITDA in 2017

Growth Projects / M&A

  • Williams Companies (WMB) and Williams Partners (WPZ) announced a series of transactions to simplify the combined enterprise and reduce leverage (press release)
    • WMB agreed to eliminate its incentive distribution rights (IDRs) in exchange for 289mm WPZ units valued at $11.4bn (or ~12x current annualized G.P. distributions)
    • WMB will hold 72% of WPZ’s outstanding units after the IDR elimination
    • WMB announced 50% increase in dividend to $1.20/share annualized
    • WPZ announced 29% reduction in distribution to $2.40/unit annualized
      • WPZ outright distribution cut comes just a few years after a stealth distribution cut to merge with ACMP
      • Joins the dubious list of MLPs to have executed both stealth and outright distribution cuts, alongside the likes of APL, XTEX, HLND, CEQP, KMP
    • Other announcements: WMB announced $2.0bn private placement into WPZ (see above) and WPZ announced expectation for approximately $2.0bn in proceeds from asset sales, the combination of which will alleviate WPZ’s need to access the equity markets for “several years”


  • Blackstone (BX) talks to acquire Energy Transfer (ETP) assets have come to an end (Bloomberg)
    • The reports of discussions first surfaced in the WSJ on 12/22/16, which mentioned Blackstone and former ETE CFO Jamie Welch potentially teaming up to acquire assets worth up to $5bn
  • EQT Midstream (EQM) disclosed resignation of COO Randall Crawford, effective 2/28/17 (filing)
    • Crawford has been the face of EQM at industry conferences since IPO
  • American Midstream (AMID) disclosed resignation of COO of Matthew Rowland, effective by 3/1/17 (filing)
  • John Fox, former CEO of MarkWest Energy issued a letter to Marathon Petroleum (MPC) opposing the merger (article)
    • Fox supports the IDR exchange for MPLX units, but would prefer it to be immediate, and believes dropping down MPC assets into MPLX dilutes the growth story around the legacy MWE midstream footprint
  • Kinder Morgan’s (KMI) Trans Mountain pipeline cleared its last major regulatory hurdle after receiving environmental approval from British Columbia’s government (Bloomberg)

Distribution Announcements
Distribution announcements_1-13-17

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