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December 3, 2017

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Week Thoughts: MLPs Make Bit of Coin

After plumbing fresh 2017 depths each of the first three days of the week, MLPs bounced hard Thursday with some follow-through Friday to finish the week up 3.0%. It was the best week for MLPs since the late June when oil prices bounced from the low $40s.

Overhang from seasonal technical factors, some uncertainty regarding FERC and tax reform weighed on MLPs early in the week.  The bounce had no single catalyst.  Rather it seemed to be the combination of:

  • Uneventful OPEC and non-OPEC production agreement extension through 2018
  • Capital markets activity that reduced need for common equity (including preferred offerings, private placements, large bond issuances) while highlighting demand for midstream paper beyond common units
  • A late amendment to the possible tax reform bill was positive on the margin for MLPs
  • Easing of seasonal technical pressure from tax-loss selling or other end of the month forced selling
  • Value buyers of discarded stocks stepping in

Oil wasn’t the driver this week, but at more than $58/bbl (35%+ up since the June low) and supported by global OPEC and non-OPEC oil producers around the world, oil prices remain supportive of production growth and MLP volume growth.  In addition, propane prices are at their highest point since October 2014, supportive of processing economics and NGL infrastructure.
Given the fundamental backdrop, strong demand for MLP preferred equity and significant underperformance of MLPs this year, MLP investors were despondent and management teams were frustrated at the Jefferies energy conference I attended in Houston this week.
Next week will include some preliminary 2018 expectations from the likes of KMI and WES, plus some producers presenting at the Wells Fargo energy conference.  In addition, ANDX and ENB/EEP/SEP will hold analyst days.  Those expectations from management teams are likely to be positive relative to current investor sentiment, given the fundamental backdrop and likely improved business activity since this time last year.
“Russ, we checked every bulb, didn’t we?”
Immediately after Thanksgiving, like many red-blooded Americans, I race to put up Christmas decorations outside my house, so I don’t get caught having to do it when its literally freezing outside in December.  During that process, inevitably some lights don’t work, and I have to painstakingly go through each light to make sure the bulbs and fuses are fresh, and sometimes they still don’t work.
MLP investors have been like Clark Griswold trying to get his Christmas lights to work in the 1989 class Christmas Vacation.  After checking each one of the 25,000 bulbs covering the entire house, frustration mounted to the point where Clark was wrestling with a plastic Santa Claus.  Still, they wouldn’t light up, until his wife flipped a switch in the utility room and suddenly lights blared.

MLP investors that saw oil prices crush the MLP sector have been miffed that improved oil prices have not turned on a rally in MLPs.  There are structural, technical, competitive and financial reasons MLPs have traded poorly, but for this week at least, a switch was flipped and MLPs finally turned on.

Status Update
The last day of November saved MLPs from a third 4% decline in 4 months.  Instead, MLPs finished down 1.4% including distributions.  MLPs still have some catching up to do to avoid a 3rd straight negative quarter (-5.4% through 11/30), which is possible (the highest return ever for a December was 2009 at 6.6%).  Its unlikely MLPs will climb all the way back to even before the end of the year, but finishing strong would be a welcome relief.

We’ve now passed through the seasonally weak period for MLPs, and have entered the seasonally positive period for MLPs.  November and May have been the worst months for MLPs over the years.  December and especially January have been among the best months for MLPs historically for obvious reasons as post distribution capture and tax loss season fade and hope emerges as the calendar turns.

The chart below lists all the months the MLP Index has declined 3%+ over the last 13 years.  This year, we added another 3 such months, which has been painful.  But compared with 2015 and 2008, 2017 selloff has been relatively orderly, with no 5% down days or months.

Winners & Losers
There were some serious pops among MLPs this week.  Producer-sponsored G&P MLPs HESM and AM rallied sharply on no news.  HESM IR did send out Hess trucks to some of us this week, and that may have helped remind folks HESM exists.  EEP rallied 12.4% on better than feared 2018 guidance ahead of the Enbridge analyst day next week.   NS rallied after pricing a preferred offering early in the week and after a painful few months of price action.  SHLX’s drop-down that came earlier and cheaper than expectations, helped it rally.

OMP went from top 3 last week to bottom 3 this week.  PAA and EPD were under pressure late last week and early this week on the FERC marketing ruling, but rallied after EPD and PAA indicated the ruling does not impact its business.

General Partners and Midstream Corporations
The median return of GPs and Midstream Corps underperformed the MLP Index.  High beta names SEMG and ENLC led the way, but WMB had a strong week as well.  Only one of the group was negative.  Notable that NSH didn’t rally much on NS’s big week.

WMB and ENLC made it two straight weeks among the top 3 gainers in the group.  On a YTD basis, only two names in the group are positive and the median return matches the return of the MLP Index so far this year.

Canadian Midstream Corporations
Mixed performance in Canada this week, amid a flurry of announcements.  TransCanada affirmed its dividend growth outlook through 2020, but some of the details did not sit well with the market, and TRP was near the bottom for a second straight week.  Enbridge’s analyst day preview and equity deal was met with much more enthusiasm.  Keyera’s equity offering made it difficult for it to ride the positive midstream wave late in the week.

ENB’s solid week wasn’t enough to pull it from the bottom of the group for the year so far.  There remains a wide gap between the best 3 performers (Pembina, KML, TRP) and the rest.

News of the (MLP) World
Midstream corporations and MLPs raised $3.5bn in combined external equity financing this week, including $1.1bn in preferred offerings ($300mm in Canada) and $2.4bn in common shares of Canadian corporations.  In addition, ENB announced proposal to eliminate SEP’s IDRs, which is the 7th such IDR elimination transaction to be announced in 2017.  Increasingly, IDRs have become (like lightsabers) an elegant relic from a more civilized age in MLP land, an age when cash flow was plentiful such that no one complained much about structure.

Capital Markets

  • Enbridge (ENB-CN) announced a private placement of 33.5mm common shares at C$44.84/share, raising C$1.5bn in gross proceeds (press release)
    • The shares were purchased by three large institutional investors, and they would have to be very large to take down $500mm a piece
    • The equity deal was part of a strategic review update provided this week ahead of next week’s analyst day
    • Purchase price represented a 2% discount to ENB’s price prior to announcement, and ENB’s shares rallied 6.3% in the following session
  • Enbridge Income Fund (ENF-CN) priced public offering of 18mm shares at $27.80/share, raising $500mm in gross proceeds (press release)
    • Bought deal, priced at 4% discount, and traded up 7.4% from pricing in the following session
  • Pembina (PPL-CN) priced offering of 12mm preferred shares at $25/share, raising $300mm in gross proceeds (press release)
    • The shares will be entitled to $1.225/share in fixed dividends (4.9% yield) through 2023, when the dividend rate floats based on 5-year Canadian bond yield +3.26%
  • Keyera (KEY-CN) priced public offering of 12mm common shares at $35.20/share, raising $429.4mm in gross proceeds (press release)
    • Overnight offering, priced at 3.2% discount, and traded up 0.5% from pricing in the following session
  • Andeavor Logistics (ANDX) priced $1.75bn of senior notes (press release), including:
    • $500m of 3.50% notes due 2022 at 99.690% of par
    • $750mm of 4.250% notes due 2027 at 99.822% of par
    • $500mm of 5.200% notes due 2047 at 99.668% of par
  • ANDX also priced public offering of $600mm of its 6.875% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred units (press release)
  • NuStar Energy (NS) priced public offering of $150mm of its 9.00% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (press release)

Growth Projects / M&A

  • Enbridge (ENB-CN) announced that it has formally proposed an offer to subsidiary MLP Spectra Energy (SEP) to exchange its IDRs in SEP for newly-issued common units of SEP (press release)
    • There was no indication of valuation (i.e. how many SEP units it would take), but the trend of IDR eliminations continues among mature MLPs
  • Shell Midstream (SHLX) announced drop-down acquisition for $825mm at 7.9x 2018 EBITDA multiple (press release)
    • Assets include 100% interest in 5 product terminals and partial interests in two Gulf of Mexico corridor pipelines and two strategic onshore pipelines
    • The five product terminals are backed by take-or-pay contracts each with an initial term of 10 years with options to extend to 20 years
  • Pembina Pipeline (PPL-CN) announced approval of C$400mm of new capital projects, including Prince Rupert LPG Export Terminal and North Central Liquids Hub (press release)
    • Pembina also announced $1.3bn as its growth capital expenditure budget for 2018
  • Keyera (KEY-CA) C$85-100mm of new growth projects around it Simonette gas plant, backed by a 10-year take-or-pay contract (press release)
  • Magellan Midstream (MMP) and Plains All American (PAA) announced plans to expand capacity of the BridgeTex Pipeline (50/50 JV), and have launched a supplemental open season (press release)
    • Capacity will be expanded to 440,000 bpd from 400,000 bpd
  • Magellan Midstream (MMP) also announced plans to develop a new 350,000 bpd capacity pipeline and launched an open season (press release)
    • The pipeline, which can be expanded to 600,000 bpd, will transport crude oil from the Permian and Eagle Ford to the Corpus Christi and Houston markets
  • Black Stone Minerals (BSM) announced a $340mm acquisition of mineral and royalty assets from Noble Energy (NBL) (press release)
    • $300mm of the cost will be funded by private placement of Series B Convertible Preferred Units to an affiliate of The Carlyle Group
  • Genesis Energy (GEL) announced new Powder River Basin acreage dedications and open season for new crude oil gathering services (press release)
    • Gathering system is supported by a new contract with a major operator in the Powder River basin who will dedicate 150,000 acres for ten years

Other

  • CenterPoint (CNP) announced late-stage discussions regarding their interest in Enable (ENBL) have terminated because parties could not reach agreement on a mutually acceptable transaction (filing)
  • Tallgrass (TEP) CEO David Dehaemers, purchased 52,540 shares for $2.2mm over the course of the week (filing, filing, filing)
    • Dehaemers has been consistent in his support of the public companies he runs, adding to his already large stake in TEP/TEGP in recent weeks, and it looks like this week it started to pay off
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