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July 30, 2017

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Week Thoughts: MLPs on Mute

Oil was up all week long, MLPs were flattish all week long.  The MLP Index finished exactly where it started on a price basis, but distributions added 0.8% to tilt total return slightly positive.

With a benign set of results and robust commodity backdrop, muted MLP price action this week is discouraging.  There are several possible reasons for under-performance: a fresh round of new growth projects announced that will need to get financed, a lack of enthusiasm for this oil price rally after so many head fakes, or that investors had made up their mind to sell a while ago and were waiting for one more distribution before blowing out of positions.
Tesla began delivering its first effort at a mass marketed electric vehicle this week, adding to ongoing discourse on peak oil demand that has Shell CEO Ben van Beurden (WSJ Article) prepping for lower for-ev-ver oil prices, said in the same voice and over-pronunciation of Squints from Sandlot when he tells the story of the Beast.

And yet, oil is up more than 15% off its June lows and edged ever so close to the $50/bbl promised land that has in recent history been the magic number for positive MLP performance.  For now (and hopefully not for-ev-er) MLPs remain dead money, and essentially flat for July, slightly positive with distributions.
Another heavy dose of results upcoming this week, including some very active players in the Permian like EPD and TRGP (both Thursday).  It will be interesting for me to hear updates from them and others on in-flight projects, current volumes, DUC backlogs, financing plans, and sector consolidation.  And most of all, I will be interested to see if the market finds any of that interesting.
Poll Question
MLP capital expenditures plans have surprised to the upside so far in 2017.  TRGP’s Grand Prix NGL pipeline announcement a few months back exemplified several capex trends: building ahead of production growth, in-sourcing volumes, and seeking greater integration of asset footprints.  TRGP and EPD have both announced NGL pipelines from the Permian to the Gulf Coast, and both have said they are open to joint ventures on those pipelines.  This could be the week it gets announced…what do you think?
Sorry, there are no polls available at the moment.
Winners & Losers
Despite flat sector performance, there were some serious swings among individual names.  The Teekay family of MLPs announced a restructuring for TOO that lifted both stocks.  AMID announced sale of the propane business, while SUN continues to trade well and has attracted some high profile investors of late.  On the downside, CAPL’s euphoria last week subsided upon further reflection.   Weak results from NS landed it among the losers, and SMLP pre-announced 4% reduced EBITDA guidance for 2Q on slower than expected pace of well completions.

Year to Date Leaderboard
Because it no longer trades, I removed PTXP from the YTD leaderboard, but it would have been highest at 38%.  In its absence, TGP vaulted to the top of the sector, creating a rare situation where the top performing and bottom performing MLPs are from the same MLP family.  GLOP’s distribution announcement likely helped it join the top 5 this week as well.  NBLX is still in the top 5, but is well of its early 2017 highs.

General Partners and Midstream Corporations
The range of returns was much narrower within the GP and midstream corps group, and the group outperformed for a second straight week.  TRGP, PAGP and OKE made it two weeks in a row near the top.  KMI’s rally last week didn’t carry over, despite a huge week from Kinder Morgan Canada Limited (KML).

News of the (MLP) World
No capital markets transactions, but lots of fresh growth projects announced this week.  Also, after the close Friday, ARLP announced an IDR elimination transaction that will (for now) leave two securities outstanding, despite both being partnerships for tax purposes.  Next week’s earnings barrage should offer further project announcements, and hopefully some joint venture announcements that can lead to a rationalization of some capex.

Growth Projects / M&A

  • Alliance Resource Partners (ARLP) and Alliance Holdings (AHGP) announced IDR elimination transaction (press release)
    • AHGP agreed to eliminate IDRs owned in exchange for 56.1mm ARLP common units (worth $1.1bn as of Friday’s close)
    • AHGP now owns 66.7% of ARLP’s L.P. units, a non-economic general partner and a 1% G.P. interest
    • Both securities will remain outstanding, but management indicated a simplification into just one security (ARLP) was likely in the future
    • ARLP and AHGP also announced large distribution increases alongside the transaction
    • Announced after market close Friday, ahead of ARLP’s scheduled earnings release Monday at 10am, which should provide more color
  • Western Gas (WES) announced new processing plant in DJ Basin (press release)
    • The Latham plant will consist of two 200 MMcf/d processing trains that will come online in 1Q and 3Q 2019, respectively
    • Project supported by 9-year volumetric commitments from APC, including for 100% of each train’s capacity for the initial 5 years
    • Capex for this plants is expected to total $280mm, with $50mm in 2017
    • WES also announced option to purchase up to 30% of third-party natural gas pipeline, in conjunction with APC’s commitment to the pipeline
  • MPLX announced new processing plant in STACK area in Oklahoma (press release)
    • Expected to be in-service by mid-2018
  • Tallgrass Energy (TEP) announced two acquisitions and three organic growth projects totaling $232.5mm (press release)
    • Acquisitions: $87.5mm
      • $70mm for 49% interest in the Deeprock Development crude oil terminal at Cushing, OK, increasing stake to 69%
      • $7mm for 63% interest in entity that owns freshwater facilities in Colorado, plus commitment to invest $10.5mm in the system over the next few months
    • Growth Projects: $145mm
      • 55-mile extension of Pony Express and new Grasslands Terminal
      • Pony Express refinery connections of 100,000 bpd with CHS
      • 10 year take-or-pay agreement from a new customer to support the construction of a new terminal in the Central Kansas Uplift with delivery capabilities in excess of 20,000 bpd
    • TEP is evaluating an additional $200mm in potential projects and acquisitions that could be announced later this year
  • EQM Midstream (EQM) announced a new Hammerhead header pipeline (presentation)
    • The 40-mile gas pipeline expects to have 1.2 Bcf/d capacity and will cost approximately $400mm with an in-service date of Q3 2019
  • American Midstream (AMID) announced sale of its propane business for $170mm to SHV Energy N.V. (press release)
    • The sale provides significant capital to be redeployed in core operating areas of the deep-water Gulf of Mexico, Permian Basin, and East Texas
  • Brookfield Business Partners announced acquisition of 60% of Teekay Offshore (TOO) Partners for $750mm (press release)
    • Teekay Corp (TK) will retain a 14% ownership in TOO by co-investing
    • TOO has agreed to reduce its existing common unit distribution to reinvest cash in the business and strengthen the balance sheet


  • Rice Energy had confidentially filed an S-1 for a GP IPO on 4/19/17, prior to agreement to sell to EQT (EQT Corp S-4)
  • Petronas and partners announced they will not proceed with Pacific West LNG project amid changes in market conditions (press release)

Distribution Announcements
37 distributions / dividends announced this week, by my count, and around 72 announced so far this quarter.

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