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May 1, 2016

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Week Thoughts: MLPs Log Best April Ever

MLPs held gains from last week, through a big round of distribution ex-dates and the initial round of MLP earnings, such that the total return of the MLP Index was positive for a 5th straight week.  Oil grinded higher on weaker dollar and indications of ongoing activity declines driving production lower, even as oil in inventory continues to be volatile.
Weekly Review_4-29-16
Apple’s weak quarter hurt broader market sentiment and helped send the S&P 500 lower.  MLPs are outperforming the S&P 500 so far in 2016, which prior to 2013 was very routine for MLPs to do.  Earnings were ok this week, but expect volatility in the coming weeks as less diverse gathering & processing MLPs report.
The Next Big Thing is Here?
This week’s NFL draft provided new hope for every NFL team that their fortunes might improve in the future.  Forgotten briefly are the disappointments and failures of the regular season or playoffs, the ineptitude of the existing players on the roster, or general disarray.  As a fairly new resident of Philadelphia, I’m learning that this selective memory loss occurs annually.  Fans like hope, they want to believe things will get better.  And sometimes they do.
A similar phenomenon has happened of late in the MLP sector as commodity prices have improved.  The high leverage, the promises not kept, the customer bankruptcy risk, the general upheaval for many MLPs has been set aside.  As commodity prices rise, the major midstream risks seem to be drifting further from investor consciousness.
The Q&A on this week’s earnings calls focused more on opportunities ahead.  NGL margin and volume uplift from improved ethane and propane for MLPs has become a focus.  Also, the INGAA report out a few weeks ago put some numbers behind the theoretical infrastructure needs for the next 20 years (and the numbers were still quite large, despite the commodity collapse).  So, in this week’s poll question, we lean into the hopeful sentiment and feel out what you believe to be the biggest opportunity.
Sorry, there are no polls available at the moment.
Status Update
Historic seasonal strength for MLPs did not disappoint in April.  The 11.0% return in April matched the best April ever (2009) and ranks as the 5th best month ever for the MLP Index.  April followed the best March ever for the MLP Index, and marks the first consecutive positive months since June 2014.
MLPs climbed back into the green for the year last week, and it was encouraging to see those gains hold this week even as ex-dates came and went.  As we look forward to May, distribution seasonality tends to pressure MLPs in May following the payment of distributions.  May has been negative for 5 of the last 6 years, including last year’s 3.6% decline, which sparked an unprecedented 5-month decline that saw the index decline 32.8%.
I’ve noted before that a single positive month here and there was nothing to get too excited about, and would be excited when MLPs posted consecutive months.  Back to back huge months, following the huge intra-month rally in February confirms that the worst is behind us.  There will be negative weeks and months again in the future, but hopefully not a negative streak like those we saw in 2015.
Winners & Losers
AMID was this week’s lottery winner, up 26.5% following a distribution cut and acquisitions.  SDLP’s distribution announcement and sponsor’s slightly stabilized liquidity situation helped it rally.  RRMS and MEP continued their strong runs in recent weeks.  SRLP announced an increased distribution.  CPLP’s distribution cut dragged it lower this week.  PSXP’s weak earnings landed it in the bottom 5.
MEP landed in the top 5 again this week, and is now up 104% from the bottom on 2/26, and still yields more than 20%.
Despite the big run, MEP remains among the biggest losers of the year.  CPLP dropped way back off the pace this week, while SDLP took over the top spot.
General Partner Holding Companies
GPs as a group outperformed the MLP sector.  ETE once again was near the top, while SE continued to lag, but this week was joined by WMB as the ETE/WMB merger spread seems to imply a deal is very unlikely to be consummated at this point.  EQGP benefitted from strong MLP earnings, TEGP made it two weeks in a row on good earnings and the potential REX acquisition.
News of the (MLP) World
Earnings dominated the sector this week, but there were some very interesting transactions, including more than $1.1bn worth of equity raised and more sponsor-supportive acquisitions.

  • MPLX (MPLX) announced pricing of $1bn worth of 6.5% Series A Convertible Preferred Units at $32.50/unit to a group of institutional investors (press release)
    • MPLX also announced that it raised $315mm by selling 12mm units through its ATM program
    • Combined preferred unit and ATM issuance satisfies all of MPLX’s equity needs in 2016, according to management
  • Hi-Crush Partners (HCLP) priced public offering of 6.0mm units at $7.30/unit, raising $43.8mm in gross proceeds (press release)
    • Bought deal, priced at 10.3% discount to prior closing price, and traded down an additional 4.1% in the next trading session
    • Upsized from original offering size of 5.4mm units
  • Tallgrass Energy (TEP) announced private placement of 2.4mm units at $37.24/unit to Tortoise Capital, raising $90.0mm in gross proceeds (press release)
    • In addition, TEP reported issuing $47mm worth of units through its at-the-market equity distribution program in 1Q
    • TEP also added more capacity on its ATM in an updated registration statement (filing)

M&A / Growth

  • Tallgrass Energy (TEP) announced potential acquisition of 25% interest in Rockies Express (REX) for $440mm from Sempra Energy (press release)
    • This transaction was originally agreed to between affiliated company Tallgrass Development and Sempra, but TEP has been offered the opportunity to have the purchase agreement assigned to it
    • Assuming TEP accepts this opportunity, expect more details in the coming weeks on what management believes is a sustainable rate of EBITDA for REX
    • As a result of TEP’s potential acquisition of REX, TEP amended its credit facility to increase lender commitments from $1.5bn to $1.75bn
    • TEP was up 8.2% Friday, leading the sector higher on Friday following earnings and this announcement
  • American Midstream (AMID) announced drop-down acquisition of Gulf of Mexico natural gas and NGL midstream infrastructure for $225mm (press release)
    • Assets were acquired at 6x EBITDA, according to management
    • Partially funded with $120mm of Series C convertible preferred units issued to sponsor ArcLight
    • Coincident with this acquisition, AMID cut its distribution 12.7%
  • Memorial Production (MEMP) announced the acquisition of its incentive distribution rights from sponsors (press release)
    • Transaction separates MEMP from Memorial Resource Development and will result in MEMP operating independently and without IDRs

Distribution Announcements
There were 6 distribution cuts from MLPs this week, 2 of them from AMZ members.
Distribution Announcements_4-29-16

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