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February 8, 2013

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Week Thoughts: MLPs Pause to Throw Off Distributions

This week, MLPs declined Friday to Friday for the first time this year, with the MLP Index falling 1.3% on a price basis.  There were many ex-dates in the last 10 days, which distorts things a bit, but the Alerian total return index was down 0.6% including distributions.  This happens every quarter, so its not a surprised and certainly shouldn’t be considered a signal that the good times we’ve had in MLP land are over in the near term.  MLPs can’t go up every week.
The broader market did fine this week, nothing dramatic on that front, same with treasury rates.  Oil prices had their largest week over week drop of the year this week at -1.9%.  Natural gas, propane and ethane also dropped week over week.  There will be plenty of natural gas and heating oil used in the Northeast this weekend with a snow storm of historic proportions descending, but so far that hasn’t done anything for natural gas prices.  We’ll see next week I guess if the blizzards surprise to the upside and that impacts natural gas prices, but week over week cold snaps don’t have a huge impact when natural gas storage levels remain 15% higher than the 5 year average.
Weekly Review_2-8-13
Lots of earnings on tap for next week.  I’ll be eager to see coverage ratios for 4Q given weak NGL prices, and will be eager to hear updates on distribution expectations, updates on growth projects, drilling activity around MLP gathering systems, etc.  There haven’t been many surprises so far in earnings season.  This time of year is always interesting because capital allocations to MLPs have largely been executed, which leads to the MLP pop we frequently see in January.  Its the post capital inflow time period that is interesting.  The last few years MLPs have drifted higher on limited volatility during this period until around May when we’ve seen MLPs falter heading into the summer months.  Its been a solid run for the MLP Index these last few months, but the conditions that led to that rise remain in place (low interest rates, benign broader market, improving economic stats, extensive drilling activity in shale plays, etc.), so what’s to stop MLPs from drifting higher from here?
Winners & Losers
CLMT announced a new diesel refinery project in North Dakota to take advantage of cheap crude from the Bakken.  Refinery MLPs had a very strong week, led by the variable MLPs (not in the chart below) ALDW (12.4%), CVRR (+9.9%) and NTI (+12.2%).  Brent crude was up 1.9% this week while WTI was down 1.9%, which had something to do with refinery strength.  Upstream MLPs had a rough week, with QRE dropping the most at 8.2%.


For the year, OXF won’t climb out of the seller any time soon.  SXE announced some operational issues that have impacted its price year to date.  Other small cap gathering and processing MLPs have done well this year (CPNO, XTEX, AMID), but GLP is still in the overall lead.  Given GLP’s Northeast asset concentration, will be interesting to watch to see how it trades with this major snow storm.


Last 10 Follow Ons
A new chart I’m trying out for the weekly post is a summary of the last 10 MLP follow on equity deals.  Click on the chart to see full size.  This week’s 2 deals saw significant variation in re-offer discounts and aftermarket performance.  On average MLP deals have traded up in the seven days since the offering, but it varies wildly.  The takeaway is clearly that the situation matters in terms of how follow on deals trade.  If the MLP is issuing equity to fund an acquisition, if the MLP is small and institutions have been eager to build a position in an offering, or if the broader market is rising at the time of the offering, then the deal probably does better.  The best MLPs are expert at timing equity offerings around the mine field of other equity deals and market swings.
News of the (MLP) World


We had a bit of everything this week, with the 4th MLP IPO of the year pricing last night, 2 follow on equity deals, 2 debt deals, several M&A and growth announcements.  The IPO was the first upstream MLP IPO since December 2011.  The MLP IPO pipeline is thinning out a bit, given that of the remaining 5 MLP IPOs on file, none of them has filed an amended prospectus in at least six months.  With the Jobs Act rules regarding IPOs, these things can pop up much quicker than before.  NSLP, which priced this week, made its first public S-1 filing on December 31, which has to make this the quickest MLP IPO ever from initial filing to pricing of just 5 weeks.  Expect to see some more MLP IPO filings pop up in the next few months, but I would be very surprised if the MLP IPO pipeline reached mid-2012 levels of 15 or so IPOs on file.

  • New Source Energy (NSLP) prices IPO of 4.0mm common units at $20.00/unit, raising $80.0mm in gross proceeds (prospectus link)
    • Upstream MLP with oil / NGL weighted properties in east-central Oklahoma in the Misener-Hunton formation
    • NSLP owns 14.2 MMBoe of proved reserves, 58% PDP, 71% oil / NGLs, production average through first 9 months of 2012 of 3,169 Boe/d, reserves to production ratio of 12.3 years
    • IPO priced at midpoint of the filing range of $19.00 to $21.00, resulting in IPO yield of 10.50%
    • NSLP opened trading at $20.00/unit and closed its first day down 2.55% at $19.49/unit
    • Very interesting structure that includes IDRs and subordinated units, but distribution payments on those subordinated units are tied to production such that if daily production drops below 3,200 Boe/d, subordinated units do not get paid a distribution
  • Breitburn Energy (BBEP) prices public offering of 13.0mm common units at $19.86/unit, raising $258.2mm in gross proceeds (press release)
    • Overnight offering, priced at 5.88% discount to prior closing price
  • Enterprise Products (EPD) prices public offering of 9.2mm common units (including overallotment option) at $54.56/unit, raising $502.0mm in gross proceeds (press release)
    • Overnight offering, priced at 2.55% discount to prior close
    • Offering came less than a week after EPD reached a fresh all-time high on 1/31, when you have the luxury of surprising the market with equity offerings, you can time the market pretty well


  • Martin Midstream (MMLP) prices $250mm of 7.25% senior notes due 2021 at par
  • Genesis Energy (GEL) prices upsized $350mm of private placement of 5.75% senior notes due 2021 at par

M&A / Growth Projects

  • Williams Partners (WPZ) announces Marubeni Corp has agreed to acquire a 49% interest in WPZ’s first Gulfstar floating production system (press release)
  • Genesis Energy (GEL) $125mm expansion plan to improve existing assets and develop new infrastructure in Louisiana to connect into Exxon’s Baton Rouge Refinery (press release)
  • MarkWest Energy (MWE) announces Energy & Minerals Group will increase its initial capital contribution to MarkWest Utica EMG, LLC by up to $450mm to up to $950mm (press release)
  • Blueknight Energy (BKEP) announces acquisition of 30% interest in a 70-mile crude oil pipeline project running from Pecos, Texas to Crane, Texas (press release)
  • Calumet Specialty Products (CLMT) announces JV with MDU Resources Group to develop, build and operate a $300mm diesel refinery in southwestern North Dakota (press release)
  • Magellan Midstream (MMP) announces plans to construct $50mm in new pipeline and terminal infrastructure at MMP’s Galena Park, TX terminal (press release)

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