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October 18, 2015

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Week Thoughts: MLPs Pass Stall Test Ahead of Earnings

Like the Governor of the great state of Texas and his premature tweet congratulating the Houston Astros, MLPs got a bit ahead of themselves the last few weeks.  MLPs were due for a pause after the miraculous bounce off the bottom and oil-fueled follow-through last week.  Unlike the Astros, however, MLPs regrouped from the 2 day pause and resumed their climb upward to finish the week down just 0.5%.
Weekly Review_10-16-15
MLPs outperformed commodity price changes, including a big drop in propane prices after the recent rally had put propane prices above year-end 2014 levels last week.  The S&P 500 and Utilities were both higher this week, creating a broader risk-on environment (ex-commodities) that helped MLPs catch a bid on the dip.
MLP news flow remained stagnant, with just a few small M&A transactions, a few distribution announcements, and one preliminary guidance announcement.  Operational data points will emerge at an increasing pace in the coming weeks as the first of the MLPs begin releasing 3Q results late this week. In the absence of negative news and equity issuance, MLPs had a pretty boring week overall, with exception of some social media drama.
Poll Question: Kinder’s Next Move
Given what appears to be a prolonged downturn in oil prices, leading to reduced expectations for drilling and completions, several MLPs have reduced expectations and are choosing (or being forced to choose) lower distribution growth to build up coverage.  Kinder Morgan, Inc. has maintained its 10% dividend growth guidance.  Given leverage and project delays, speculation in the market is that KMI may have to adjust expectations.  What do you think?
Sorry, there are no polls available at the moment.
In other news of a premature nature, GEL had a volatile week when an independent research firm announced Monday that GEL was added to its Best Ideas as a short and that its energy analyst would walk through their short case on GEL three days later.  The pending short case reveal was a good enough reason for some investors to get out of the way and take profits Monday, given GEL’s outperformance year to date.  Then, when the actual bear case was presumably revealed Thursday to subscribers, GEL rallied 8%, but still finished the week down more than 5%.
I am not a subscriber to the firm’s research, and therefore haven’t seen their presentation on GEL, and I don’t know the specific issues raised regarding GEL’s prospects and valuation.  However, every MLP has risks; that’s why they carry yields significantly higher than treasuries, and trade at much lower multiples than this time last year.  MLP institutions, have well-funded in-house research teams that work hard to assess risks of their MLP positions.  Different analysts can have different assessments of those risks relative to an MLP’s valuation and total return prospects.
Given what I believe to be a fairly efficient MLP market, it is unfortunate that the MLP market can be influenced enough by the announcement of a pending analyst’s opinion that it can send a multi-billion dollar MLP’s unit price into a tailspin.  But if nothing changed with the fundamentals of the business, and you believe in your analysis and opinion on a given MLP, these volatile, internet-fueled moves can be welcome buying opportunities.
It was encouraging to see GEL bounce back so quickly. I took it as a positive indicator of where MLP sentiment is today compared with where it was at the middle of last month when a much less well known Twitter prognosticator called the MLP model into question.   Like San Francisco 49ers QB Colin Kaepernick is finding out this year, it’s much harder to be successful once the league has adjusted to your game plan.  The MLP market sent a message similar to the one Bernie Sanders sent at this week’s Democratic debate when he said: “The American people are sick and tired of hearing about your damn emails.”
Winners & Losers
There was no specific news among the winners this week, although positive guidance from Antero Midstream probably helped RMP’s unit price this week.  AZUR continues to trade with extreme volatility, this time up 20% in a week with no news and lower commodity prices.
MMLP replaced VLP among the top 5, not much else changed, although it is noteworthy that HCLP is now down more than 75% so far this year, worst among MLPs that are paying distributions.
GPs under-performed MLPs this week.  The last two weeks, GPs are acting as they should, as levered plays on underlying MLPs.  MLPs up last week, GPs were up more.  MLPs down this week, and GPs were down more.  Maybe that’s an indication that MLPs have reached some sort of relative equilibrium.  ETE and WMB underperformed other GPs again this week, as the merger hangover continues to linger.
News of the (MLP) World
There was limited and mostly fringe MLP transaction news this week.  Distribution announcements continue to trickle out.  Expect earnings and distribution announcements to dominate headlines the next several weeks.
Capital Markets

  • American Midstream (AMID) files equity distribution agreement to sell up to $100mm worth of common units at-the-market (filing)
  • Enbridge Income Fund (ENF on Canadian Exchange) priced public offering of 21.5mm shares at $32.60/unit, raising $700.1mm in gross proceeds (press release)
    • Not an MLP, but a positive indication of capital access for Canadian midstream players
    • Bought deal, priced at 5.0% discount to prior closing price, and closed the next session down 0.6% (much better aftermarket support than we’ve recently seen in the U.S.)

M&A / Growth Projects

  • USD Partners (USDP) announced $225mm acquisition of crude by rail terminal in Casper, Wyoming (press release)
    • Sellers include: Stonepeak Infrastructure Partners, Cogent Energy Solutions and Granit Peak Group
    • Acquisition financed with combination of $208.3mm in cash and $16.7mm in units issued to sellers
    • Purchase price represents 8.7x multiple of expected 2016 EBITDA of $26mm
    • Cash flow is supported by take-or-pay contracts with weighted average maturity of approximately 3 years
  • Knot Offshore (KNOP) announced acquisition of Ingrid Knutsen shuttle tanker from sponsor for $115mm (press release)
    • The Ingrid Knutsen is operating in the North Sea under a 10-year time charter with a subsidiary of ExxonMobil that expires in 2024
    • KNOP expects the vessel to produce $11.5mm in EBITDA in 2016 (10x multiple)
    • KNOP also announced that its sponsor extended the charter of another vessel (Carmen Knutsen) for an additional 5 years to 2023, but the extension reduces the average charter rate on the vessel by 6.2%

Distributions Increases (quarter over quarter)

  • AM +7.9%
  • VLP +5.1%
  • KNOP +2.0%
  • OCIR +1.2%
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