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June 19, 2016

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Week Thoughts: MLPs Outperform as Votes Loom

MLPs found themselves caught up in global risk off action early in the week as fears over Brexit spread across Europe, pushing the dollar higher and oil prices lower.  After dipping below 300 briefly in the morning Tuesday, the MLP Index recovered, trading up the last 3 days of the week, defying falling oil prices Wednesday and Thursday, and digesting the largest week of equity issuance all year.
Oil prices were looking for a reason to correct, and the combination of higher dollar on Brexit fears and higher rig count provided a good catalyst (unrelated to still improving supply and demand dynamics).  Oil peaked above $51/bbl before falling for six straight days for a ~10% overall decline.  Oil finally bounced Friday and closed the week down just 2%.  Natural gas prices rallied through the macro noise and a bearish oil inventory report to close the week above $2.60/mmbtu.
Also of note, the quarterly rebalance for Alerian’s MLP Indexes occurred Friday, which probably contributed to some of the unusual trading volume numbers across the space.
Rock the Vote
The pending Brexit vote will have the market’s focus this week, but another pending vote will have the MLP world captivated: the WMB shareholder vote.  ISS recommended that shareholders vote for the deal, and most shareholders probably will.  The court dates set for Monday and Tuesday this week in Delaware may determine whether the vote is necessary or relevant.
The ETE/WMB saga has been dragging on almost as long as Donald Trump’s presidential campaign, both of which have reached the year mark over the last week.  Whatever we learn or don’t learn this week, hopefully some resolution is near.  I won’t speculate on the outcome or what outcome is currently priced in.  Instead, I’m going to enjoy Father’s Day, and I suggest you do the same.
Poll Recap – MLP 2.0 Adoption
Last week, I asked you readers how widely you thought MLPs would adopt a more sustainable MLP financial model going forward.  I cynically implied that when capital was no longer scarce, MLPs would revert back to the old ways.
The winning answer to the poll was all of the above, in other words that high distribution coverage, low leverage and IDR reductions would all be widely adopted across the MLP sector.  The results surprised me a bit, and seems to indicate the market is more idealistic (or naïve) than I thought.
Poll Results
Winners & Losers
It was a mixed bag of winners this week, although ENLK and AM both traded well on positive read-throughs from their producer-sponsors’ M&A activities.  FGP rebounded a bit from last week’s carnage.
On the downside, TGP made the bottom 5 despite a 10.7% pop on Friday.
NGL took over the top spot with a 90% total return so far this year.  Not many other changes among the winners and losers for the year.  The MLP Index is up nearly 11% year to date, way ahead of the S&P 500.
General Partner Holding Companies
GPs overall traded roughly inline with the MLP Index this year.  WGP’s secondary offering weighed on WGP and for some reason the other high growth premium GPs like TEGP and EQGP.  SEMG did equity as well this week, but traded up after pricing, as it seems like oil price changes are the overriding factor in the daily price movements for SEMG.
On the positive side, there seems to be some hope of a positive outcome for WMB from next week’s court dates that helped WMB recover some of its losses from last week.
News of the (MLP) World
We got further evidence of an improving equity capital market.  Three equity offerings priced this week, and the two primary offerings traded well in the aftermarket.  Also, Mexican natural gas demand manifested itself in two large scale pipeline projects announced this week to serve Mexico.  We’ve seen many more $1bn+ projects canceled and delayed than announced in the midstream sector, so these announcements are encouraging.

  • Western Gas Equity (WGP) priced public offering of 12.5mm units at $38.48/unit, raising $481mm in sales proceeds (press release)
    • Secondary sale, all proceeds going to sponsor Anadarko
    • Overnight block trade, priced at 8% discount to prior closing price, traded down 3.6% from pricing to finish the next trading session down 11.1% overall
    • Anadarko retains more than 67% interest in WGP
  • Hi-Crush Partners (HCLP) priced public offering of 4.5mm units at $10.80/unit, raising $48.6mm in gross proceeds (press release)
    • Priced at 9.4% discount to prior closing price
    • Offering upsized from original 3.0mm unit offering
  • Semgroup Corp (SEMG) priced public offering of 7.5mm shares at $27.00/unit, raising $202.5mm in gross proceeds (press release)
    • Upsized from original 5.0mm offering, priced at 7% discount to prior closing price
    • Traded well, catching Friday’s oil price rally and finishing up 10.6% from pricing in the next session
  • Teekay Offshore (TOO) announced $200mm equity issuance through two private placements (press release)
    • TOO to issue $100mm of 10.5% Series D Cumulative Exchangeable Perpetual Preferred Units, with 4.5mm warrants with a $4.55/unit exercise price and 2.25mm warrants with $6.05/unit price
    • TOO to issue $100mm worth of common units at $4.55/unit
    • Each private placement was made to a “group of investors”
    • The entire Teekay complex rallied hard Friday (TOO +12.3%, TK +10.1%, TGP +9.2%)

M&A / Growth

  • TransCanada Corp (TRP) and IEnova (publicly-traded Mexican subsidiary of Sempra Energy) announced that its joint venture was chosen to develop and operate a $2.1bn natural gas pipeline in Mexico (press release)
    • The pipeline will be backed by 25-year contract for 2.6 bcf/d of natural gas transportation with the Comision Federal de Electricidad (CFE), Mexico’s state-owned power company
    • Pipeline expected to be in-service by 2018
    • The JV will be 60% owned by TRP and 40% owned by IEnova
  • Spectra Energy (SE) announced that it was awarded a 168-mile, $1.5bn intrastate natural gas pipeline project to connect U.S. supply to a newly developed natural gas pipeline in Mexico (press release)
  • Natural Resource Partners (NRP) announced sale of non-operated oil & gas working interest assets in the Williston Basin for $116.1mm (press release)
    • The sale represents NRP’s exit from the non-operated oil and gas working interest business


  • WMB proxy re-iterates that the original estimate of more than $2bn of synergies should not be relied upon and the updated and actual number is much lower (filing)
    • WMB also announced $0.10/share dividend payable if the merger vote happens and the merger closes (filing)
    • Updated presentation regarding the merger also posted filed by WMB (filing)
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