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July 27, 2014

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Week Thoughts: MLPs Push through IPO and Gas Gluts

Even as natural gas prices continue to plummet (-4.3% this week to $3.78), the Alerian MLP Index edged slightly higher this week.  Utilities were down slightly, while the S&P 500, oil and 10-year US treasuries finished the week almost exactly where they started.  A solid macro backdrop and low interest rates, combined with solid early earnings results and distribution announcements continue to support MLP valuations.
Weekly MLP Review_7-25-14
Distribution and earnings announcements are whizzing past at a dizzying pace, which will only accelerate this week.  It can be overwhelming, like when my 3 young kids are all talking at once.  EQM and NS had the floor to themselves this week.  It’s clear from EQT Corp’s 2Q results that pricing pressure for Marcellus production continues, and wider differentials should lead to greater willingness for producers in the region to commit to natural gas takeaway projects.  EQM management said on its conference call that the top priority is to address the southeast demand opportunity while the competition is still somewhat limited.
NS results highlighted growing activity in South Texas, both in terms of production activities, but also in terms of port and terminal activities.  It was reported by Platts that crude and condensate shipments out of the port of Corpus Christi rose 61.5% since last year (Fuel Fix).  NS results are confirmation of that activity.  We’ll get more color on export activity from the greater Houston area ports when EPD and NGLS report results this week.
Winners & Losers
Transactions made the MLP world go ‘round this week.  GSJK was down 12.2% after announcing a transformative compression acquisition plus equity and debt financing offerings.  GSJK embarked on a rare 4 day roadshow for a follow-on offering, and the offering was almost like a second IPO given how limited its float had been.  TEP was also in the market early in the week with a weak earnings pre-announcement and an equity offering, which contributed to its decline.  Not transaction-related, OILT and MPLX continued the trend of high growth drop down MLPs making the bottom 5 lately.
On the positive side of the ledger, QRE agreed to merge with BBEP, resulting in a big gain on the announcement.  Interestingly, the MLPs you would look at as comparable upstream MLPs that are comparable acquisition targets (LRE and NSLP) both rallied this week more than the MLP that is actually getting acquired.  WNRL reversed its negative trend of late to post nearly an 8% price increase.
We have a new leader for year to date returns, which seemed like an impossibility just a few weeks ago, when PSXP was up more than 100% year to date.   PSXP continues to slide, even after announcing a 10% quarter over quarter distribution increase this week. HCLP has taken the top spot.  Also, GLOP and SUSP climbed into the top five, replacing TEP and OILT.  EXLP rejoined the bottom 5, replacing CMLP.
News of the (MLP) World
If you read through the bullets I wrote below on the 3 IPOs in the market this week you will see evidence of a clear formula that has developed.  If you have some assets, rather than putting them all into an MLP or putting just a few into an MLP, the formula is to put all your assets into a private vehicle in between the MLP and the sponsor, then sell a portion of that private vehicle to the MLP.  Then growth becomes a simple calculation of just selling the remaining percentage of that private vehicle to the MLP in pieces over time.  It’s manufactured, but highly visible (at least for a while), growth.  If I were launching an MLP, I might be tempted to call it OpCo Partners, just to confuse everyone.

  • Westlake Chemical Partners (WLKP) launches $225mm MLP IPO of 11.25mm units (prospectus)
    • Expected to price July 29th
    • 5.50% midpoint yield, 1.1x distribution coverage
    • MLP will own 10% of a company (OpCo) that owns ethylene crackers and has a 12 year contract for 95% of capacity at a fixed $0.10 margin
    • WLKP grow primarily by migrating the remaining 90% of OpCo from parent Westlake Corp (WLK) to WLKP over time
  • Transocean Partners (RIGP) launches $350mm MLP IPO of 17.5mm common units (prospectus)
    • Expected to price July 30th
    • 7.25% midpoint yield, 1.1x distribution coverage, almost no debt, 1099 filer
    • MLP will own 51% interest in companies (RigCos) that own a combined 3 offshore drilling rigs, contracted with BP and Chevron for a weighted average remaining contract life of 4.1 years
    • RIGP will grow by migrating the remaining 49% interests in RigCos and additional assets from parent Transocean (RIG) to RIGP over time
    • Seadrill Partners (SDLP) is the closest comp, which is trading at 6.3% yield after growing distributions 29.9% year over year
  • VTTI Energy Partners (VTTI) launches $350mm MLP IPO of 17.5mm common units (prospectus)
    • Expected to price July 31st
    • 5.25% midpoint yield, 1.1x distribution coverage, 1099 filer
    • VTTI will own 36% in VTTI Operating, which owns 6 refined products and crude terminals around the globe with aggregate storage capacity of 35.5 mmbbls, contracted with parent Vitol and third party customers for a weighted average remaining contract life of 4 years
    • VTTI will grow by migrating the remaining 64% interest in VTTI Operating and other terminals from parents Vitol and MISC to VTTI over time
    • VTTI will also be active either at the MLP or sponsor level in developing and acquiring additional terminals in the global market, which VTTI describes as much more fragmented than in the U.S.
  • Tallgrass Energy Partners (TEP) prices public offering of 7.0mm common units at $41.07/unit, raising $287.5mm in gross proceeds (press release)
  • Compressco Partners (GSJK) prices public offering of 15.3mm common units at $23.50/unit, raising $351.4mm in gross proceeds (press release)
    • Marketed offering, with file-to-price decline of 10.3%
    • Offering proceeds will be used to partially finance the accretive $850mm acquisition announced earlier this week
  • GreenHunter Resources (NYSE: GRH) announces plans to form MLP (press release)
    • Has submitted PLR request for business of handling of fluid storage, treatment and disposal services, frac tank rental, water monitoring services, and environmental remediation services that constitute part of the exploration, developmental, mining, processing, refining and transportation of natural resources.
  • Regency Energy (RGP) files S-3 to register 2.8mm units owned by Eagle Rock Energy (EROC) (filing)


  • Regency Energy (RGP) prices offering of $700mm of 5.0% senior notes due 2022 at 99.158% to yield 5.04% (press release)
    • Upsized from $500mm originally offered

M&A / Growth Projects

  • Breitburn Energy (BBEP) announces acquisition of QR Energy (QRE) in an all-stock transaction that values QRE at approximately $3.0bn (press release)
    • Each QRE unitholder will receive 0.9856 units of BBEP per QRE unit
    • Transaction values QRE at $22.48/unit, a 19% premium to the prior day’s closing price
    • Expected to close in late 2014 or early 2015
    • This will mean a change for the Alerian MLP Index, as QRE will come out, probably not to be replaced by another upstream MLP
  • ONEOK Partners (OKS) announces $365-$470mm of growth projects in the SCOOP play in Oklahoma (press release)
    • OKS plans to build a 200 MMcf/d processing plant and related natural gas infrastructure in Grady and Stephens County, OK
    • Project backed by producer acreage dedications to OKS in the area
    • Management expects returns 5-7x EBITDA for the project
  • Tallgrass Energy (TEP) announces opportunity to buy 1/3rd interest in Tallgrass Pony Express  Pipeline for $600mm (press release)
    • TEP has received an offer, pursuant to its right of first offer, a 33.3% interest in Pony Express from its sponsor, Tallgrass Development
  • Compressco (GSJK) announces acquisition of Midland-based Compressor Systems, Inc. for $825mm (press release)
    • Acquisition increases GSJK’s compression capacity from 187,000 to 1,045,000+ and expands range of compression services to customers
    • Acquired business had $82.3mm in EBITDA over the last 12 months (10x multiple), but GSJK expects to realize $5-10mm in annual synergies from the transaction
    • GSJK expects to raise distributions 12-14% for 4Q 2014, while maintaining 1.2x distribution coverage
  • Capital Products Partners (CPLP) announces drop down acquisitions from Capital Maritime and a reset of its incentive distribution rights (press release)
    • CPLP will acquire 3 containerships and 2 product tankers for total of $311.5mm
    • The acquisitions are contingent upon a revision to the IDRs to lower the threshold for IDR payments, but also to cap the top tier at 35% (including 2% GP interest)
  • Mid-Con Energy (MCEP) announces $56.5mm acquisition of reserves in Oklahoma from an affiliate (press release)
    • Transaction include 2.6 mmboe of proved reserves that are 88% PDP and 90% oil, and that carry a 17.5 year reserve life


  • U.S. department of transportation proposed a 2-year phase out period to replace or refurbish more than 100,000 tank cars that transport crude to meet more stringent standards (Wall Street Journal)
    • Proposals include stronger tank cars and speed limits of 40 mph
    • Will pressure MLPs that own rail cars that do not meet the guidelines, but if regulation were to decrease price competitiveness of rail vs. pipe, it might make pipeline projects more viable in certain regions, which will help certain MLPs
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