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April 30, 2017

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Week Thoughts: MLPs Maintain on Mailbox Money

MLPs have entered distribution ex-date season, which means while the price index declined for the week overall, MLPs were slightly positive when factoring in distributions.  Anticipation of those distributions may have supported MLPs relative to the broad energy sector over the last two weeks, even as the rate of distribution cuts remains alarmingly high. MLPs once again fared better than oil prices and other energy stocks.  Natural gas price strength may have helped, along with another strong week from the broader equity market.
With a very heavy earnings load next week, perhaps MLPs can continue their recent divergent trading relative to a very fragile commodity and energy stock environment with some positive stock-specific news.
Tax Reform? Tax reform did creep into a few analyst notes, with speculation on what the flow-through tax rate proposal might do or not do for MLPs.  Given the early stage of potential tax reform and still limited details, its still very unlcear what impact eventual tax reform will have on investor appetite for MLPs, and sponsor interest in creating MLPs.
Meanwhile in the Marcellus: This week served as a reminder of some positive midstream trends in the Marcellus, notable because of the almost exclusive Permian focus industry-wide so far this year.  The Antero GP roadshow, MPLX results, and Marcellus producer results drew some focus back to the great Northeast, and not just because the NFL draft was held in Pennsylvania.  As earnings season continues, expect the MLP conversation to quickly shift back to the Permian and Oklahoma.  In an increasingly saturated gas and NGL market, intra-basin competition is ramping up, with distance to marginal demand playing a central role.
Status Update
The end of the month conveniently landed on Friday, and MLPs were negative this month.  April’s streak of 12 straight positive years is over, and there are no active streaks that extend beyond a single year at the moment.  April and March were both negative, the first back to back negative months for the Alerian MLP Index since January and February 2016.
May has historically been hit or miss, with about half positive and half negative months historically, with a range of -7.5% in 2012 and +9.3%.  May was positive last year, however, and with some positive OPEC outcome and decent 1Q results over the next few weeks could set up for a strong summer of performance.
Winners & Losers
CNNX was up more than any other MLP this week on no stock specific news, but it is likely that Antero’s GP IPO roadshow and MPLX results have brought some attention back to the Northeast G&P names.  AM also made the top 5.  EEP’s long-awaited distribution cut was received well on Friday, vaulting it into the top 5.
NGL’s lowered guidance and lower for longer distribution announcement tanked its shares early in the week.  Last Friday’s late night distribution cut (8:30pm press release) sent its shares tumbling Monday.
YTD Leaderboard
Not much change at the top of the sector.  GLOP ascends to the top 5, replacing MEP, but NBLX and OKS still atop the leaderboard.
Each of the bottom 5 from last week were positive this week, causing some reshuffling at the bottom of the sector.
General Partners and Midstream Corporations
KMI and ENLC went from worst to first in the midstream corp and GP group this week.  ETE, WMB and WGP made it two weeks in a row among the top 5.
News of the (MLP) World
Big week of transactions, including theoretical IPOs (KM Canada), potential IPOs (GPMP) and actual IPOs (AMGP).  Plus, the Enbridge complex got a little less complex, and EEP investors got a lot less income.  Expect more project announcements (like MPLX this week) to come from the long list of MLPs reporting results in the next week.
Capital Markets

  • Antero Midstream GP (AMGP) launched IPO of 37.25mm shares at midpoint price of $23.50/share, seeking to raise $875mm (filing)
    • AMGP owns almost all of the incentive distribution rights (IDRs) of Antero Midstream
    • Midpoint price implies IPO yield of 1.36% based on next 12 months distribution of $0.32/share
  • Kinder Morgan Canada Limited filed initial prospectus for IPO on the Toronto Stock Exchange (prospectus)
    • The company was formed to acquire an interest in Kinder Morgan Canada LP, which will own Trans Mountain pipeline system along with other Canadian assets
    • This was well-telegraphed by KMI, which is pursuing dual processes of an IPO or a joint venture and is expected to pick one or the other within the next month
  • GPM Petroleum LP (GPMP) filed updated registration statement for MLP IPO seeking to raise up to $100mm (filing)
    • GPMP originally filed for an MLP IPO on 4/20/15, along with several amended S-1 filings, but the market has been challenged for any MLP IPOs not backed by large publicly-traded sponsors, and GPM withdrew its registration request in late 2016
    • GPMP is engaged in the wholesale distribution of motor fuels on a fixed-fee per gallon mostly to its sponsor (with 805 convenience store gas stations)
    • GPMP expects to generate $38.5mm in EBITDA in the next 12 months
    • In January 2016, GPMP received a $70mm private equity investment from MLP manager Steelpath
  • NuStar Energy (NS) priced public offering of 14.0mm of its 7.625% Series B fixed-to-floating rate cumulative redeemable perpetual preferred units at $25/unit (press release)
    • Net proceeds of $338.3mm will be used to fund a portion of the previously announced Navigator Energy acquisition

Growth Projects / M&A

  • Enbridge Energy Partners (EEP) announced completion of its strategic review, which included distribution cut and asset sale (press release)
    • EEP will sell all of its interests in the Midcoast Gas Gathering and Processing business to EECI for $2.15bn
    • Quarterly distributions cut from $0.583/units to $0.350 (40%)
    • EEP redeemed all of its Series 1 preferred units held by EECI for $1.2bn with proceeds from the issuance to EECI of $1.2bn in EEP common units
  • Navios Maritime Partners (NMM) announced the acquisition of one Capesize vessel for $27.5mm with expected EBITDA of $3.7mm (press release)
  • Noble Energy (NBL) completed Clayton Williams Energy acquisition, increasing Noble Midstream (NBLX) acreage dedications (press releases)
    • 64,000 net acres in Reeves County, Texas were dedicated to NBLX
    • Rig activity to accelerate from 1 rig now to 2 rigs by end of 2Q17 and to 3 by YE 2017
  • Energy Transfer (ETP) unitholders approve merger with Sunoco Logistics (SXL) (press release)
    • Combined company will be named Energy Transfer Partners, L.P. (ETP) with common units expected to begin trading on May 1
  • MPLX announced (with its earnings release) construction of a new processing plant in the Delaware Basin (press release)

Distribution Announcements
35+ MLPs announced distributions this week.  Four distribution cuts, but WPZ and CELP had been announced previously, and EEP’s was strongly hinted at.  So CCLP was the big surprise, along with the lack of a raise from NGL.  There was also one stealth cut for ETP unitholders that are now SXL unitholders, but by next week will be ETP unitholders again (when SXL changes name to ETP).  Each cut improves sector leverage and distribution sustainability going forward as the sector continues to recover.

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