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June 29, 2014

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Week Thoughts: MLPs Move on More Catalysts

MLPs had their best week of the year this week, with the Alerian MLP Index posting 2.7% in total returns, compared with flat S&P 500 and +0.9% for utilities.  MLPs are closing in on a 4th straight positive month, which would make it 9 positive months out of the last 10.
Year to date, the MLP Index has doubled the price change of the S&P 500, and is gaining on utilities, which have seen their prices rise 14.4% this year so far, on lower than expected interest rates.  Looking back 12 months, however, the S&P 500 still has the edge at 21.6% price change vs. 14.2% for the MLP Index.
Weekly MLP Review_6-27-14
Falling yields have been a major tailwind for the sector in 2014, but there are plenty of sector-specific catalysts that could drive MLPs higher the rest of the year, including MLP mergers/consolidation, asset M&A, new project activity and changes in regulation (e.g. crude oil export restrictions).  Last week, consolidation was a major driver (with WMB/ACMP and ETE/TRGP news), while this week it was new pipeline developments and the allure of condensate exports that seemed to send MLPs higher in a flat broader market.
The Obama Administration, through the Commerce Department, took what many interpreted to be the first step towards loosening of crude oil export restrictions this week, by allowing exports from EPD and Pioneer Natural Resources of condensate that has been minimally processed in a distillation tower, as first reported by the Wall Street Journal.  A relief valve for growing condensate volumes should be a positive for MLPs, but should be a headwind for refinery operators that rely on a wide spread between domestic and international oil prices.  There were several articles at Fuel Fix that explained the details of the approval and some of the implications (Condensate export approval, Impact on refiners, Eagle Ford condensate).
Winners & Losers
HCLP was the leader this week, buoyed by the announcement of a contract extension with Halliburton for frac sand through the end of 2018.  It was HCLP’s second straight week in the top 5.
Amid the flurry of pipeline announcements, BWP and ENBL didn’t announce anything, but both have long-haul inter-state natural gas pipeline assets.  EEP continued upward following its IDR restructuring and its Sandpiper oil pipeline project reminder.  RRMS was up on its drop down and upward revision to guidance announcements.  On the downside, smaller refinery-sponsored logistics MLPs PBFX and WNRL were both down in a week that saw broader weakness in refinery stocks following the condensate export buzz.
Year to date, visible growth is getting disproportionately rewarded relative to other MLPs.  HCLP replaced TEP among the top 5 this week, and EXLP replaced USAC.  What’s striking is how few MLPs have produced negative absolute returns year to date, with the fifth worst MLP down just 2.0% including distributions.  MLPs overall have done very well, with the Alerian MLP Index up 15.6% in 6 months.
News of (MLP) World
The demand in the IPO market for yield product seems limitless.  NextEra was the latest yield-based equity to have a huge IPO pop this week, and second consecutive yieldco to pop around 30% on its debut, despite IPO yields that ratchet lower with each deal.  The MLP IPO backlog officially added another filed MLP, but it was one the market was expecting.  Maybe July 4th will slow down the torrid pace of MLP news we’ve had this month.  It’s usually a quiet week for capital markets, but M&A is always a wild card, with bankers and executives eager to finalize deals before the long weekend.

  • Knot Offshore (KNOP) prices public offering of 4.6mm units at $28.43/unit, raising $130.8mm in gross proceeds (press release)
    • Overnight offering priced at 4.9% discount to prior close
  • NextEra Energy Partners (NEP) prices IPO of 16.25mm units at $25.00/unit, raising $406.3mm in gross proceeds (Bloomberg)
    • Priced at the high end of the range of $23.00-$25.00, which had been raised $4.00 from $19.00-$21.00/unit
    • Opened at $32.55 (+30%), closed up 28% on the day, very similar to Abengoa Yield (ABY) a few weeks ago
  • CVR Refining (CVRR) prices public secondary offering of 6.5mm common units at $26.07/unit, raising $169.5mm of gross proceeds for CVR Refining Holdings (press release)
    • Overnight offering priced at 3.9% discount to prior close, CVRR traded down 4.9% from pricing in the following session, but that may have been the result of weakness across publicly-traded refinery operators following the condensate export announcement
  • Teekay Offshore (TOO) files F-3 (shelf registration) to register up to $500mm of common units for sale (filing)
  • Transocean Partners (RIGP) files initial registration statement to raise up to $350mm in MLP IPO (filing)
    • Formed by $16bn market-cap public company Transocean (RIG)
    • RIGP will own and operate offshore drilling rigs
    • Initial assets will include 51% interest in the companies that operate 3 ultra-deepwater drilling rigs, currently operating in the Gulf of Mexico
    • Rigs are operated under long-term contracts with Chevron and BP, average remaining contract life of 4.2 years
    • RIGP will have right of first offer on the remaining interest in the 3 initial rigs and on 4 additional rigs listed in the S-1, plus any other rig that RIG puts into service with more than 5 years of contract life
    • RIGP is expected to produce $110mm of cash available for distribution in first 12 months post-IPO
    • Full incentive distribution rights up to 50% to be held by RIG
  • QEP Resources files Form 10 registration for spin-off of QEP Field Services (press release)
    • New entity will be renamed Entrada Midstream and will trade under ticker EMID
    • Entrada assets will consist of:
      • 100% of the IDRs and a 55.8% L.P. interest in QEP Midstream (QEPM)
      • Interests in gathering, processing, and fractionation systems in the Uinta and Green River Basins
    • QEP’s Haynesville gathering system not included in the spin-off
    • First step in spin-off process that was first announced in December as a direct response to activist investor pressure


  • Williams Partners (WPZ) prices $1.25bn worth of senior notes (press release)
    • $750mm of 3.90% senior notes due 2025 at 99.69% of par to yield 3.91%
    • $500mm of 4.90% senior notes due 2045 at 99.229% of par to yield 4.94%
  • Rose Rock Midstream (RRMS) prices $400mm of 5.625% senior notes due 2022 at par (press release)
  • NGL Energy (NGL) prices $400mm of 5.125% senior notes due 2019 at par (press release)
    • Offering upsized from $350mm for the rare 5-year notes offering

M&A / Growth

  • Energy Transfer (ETP) announces natural gas pipeline project connecting Marcellus and Utica supplies via interconnections to Gulf Coast and Canada markets (press release)
    • 2.2bcf/d capacity, expandable to as much as 3.25 bcf/d – a very big pipeline
    • ETP has anchor commitments from producers American Energy – Utica, Antero Resources, and Range Resources Corp
    • ETP has launched a binding open season to secure additional commitments
    • Pipeline is expected to be in-service in stages starting in 4Q 16
  • Energy Transfer (ETP) announces new 1,100-mile crude oil pipeline from Bakken production area in North Dakota to Illinois, where it will connect with ETP’s Trunkline pipeline to gain access to the Gulf Coast (press release)
    • Bakken pipeline will be in-service by the end of 2016, matching the timeline of the conversion of the Trunkline pipeline from natural gas to crude oil service
    • Affiliated MLP Sunoco Logistics (SXL) may be a significant equity participant in the pipeline
    • Trunkline will feed the Nederland crude oil terminalling facility operated by SXL along the Gulf Coast
    • ETP also plans to build a rail facility in Illinois to provide rail access to East Coast refineries for Bakken Crude oil
  • Enterprise Products (EPD) announces a 1,200-mile long, 30-inch thick pipeline to connect Bakken oil production to Cushing, OK (Reuters)
    • No official news release listed on EPD’s website and no filings with the SEC discussing the topic this week to confirm or add more color
  • Rose Rock Midstream (RRMS) announces acquisition of remaining 1/3rd interest in parent Semgroup’s 51% stake in White Cliffs Pipeline for $300mm (press release)
    • White Cliffs is a crude oil pipeline running 527 miles from Colorado to Cushing, OK
    • Funded with $114mm of borrowings under RRMS’s credit facility
    • $182mm of equity issued to Semgroup, including $62mm of Class A units that do not receive a distribution and are convertible to common units once White Cliffs Pipeline achieves 125,000 bbls/d of volume
    • RRMS and SEMG both raised EBITDA and distribution / dividend guidance as a result of the transaction
  • Tesoro Logistics (TLLP) announces acquisition of certain terminalling and pipeline assets from parent Tesoro Corp (TSO) for $270mm (press release)
    • Funded with $243mm of cash and borrowings and $27mm worth of equity back to TSO
  • Private company Southern Star Central Gas Pipeline announces open season for a pipeline to connect the SCOOP are of Oklahoma with the Bennington Pipeline Hub in Oklahoma (press release)
    • Southern Star Central is owned by Morgan Stanley Infrastructure Partners
  • Enbridge Energy (EEP) announces that its $2.6bn Sandpiper Pipeline project to provide crude oil transportation out of the Bakken received a key permit to begin construction of the pipeline (press release)
    • Not much incremental information about the project in this press release.  It seemed to be EEP’s way of reminding the market that it also has a Bakken crude pipeline project that is moving forward


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