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November 1, 2015

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Week Thoughts: MLPs Re-Animated

After last week’s carnage, MLPs bounced this week to finish October on a positive note.  The MLP Index produced total return of 2.9% on the week, helped by positive oil price action and large capitalization MLP earnings that were good enough to spell relief.
Weekly MLP Review_10-30-15
MLP volatility continues, but with more treats than tricks since the bottom at the end of September.  The next few weeks of earnings will be the final chance for many MLPs to provide data points to the market before year-end, before the market shifts focus back to energy macro and questions of just how low oil prices will stay for how long.
The DUC Corollary
If MLPs can string together a few positive weeks in a row and maybe another positive month, they’ll run into a high class problem that’s worth flagging.
MLPs are cheap today, relative to themselves in the past and relative to other yield alternatives.  At some point positive fund flows will return to the sector, and the capital markets machine will be re-animated.  Higher prices will encourage equity offerings, which will be a headwind to even higher MLP prices, until the backlog clears.
This is similar to the growing inventory of drilled but uncompleted wells (DUCs) waiting on higher oil prices.  Those DUCs are a potential drag on oil price increases as higher prices will be met with new wells.
Unlike the DUC situation, MLPs can take action to reduce the equity backlog while capital markets are effectively closed.  The more MLPs that can solve their equity needs without the capital markets (or commit to not issuing traditional equity for some period of time), the easier the path for MLP price recovery.
We saw a few MLPs take such steps this week.  NGL will sell its TLP common units to raise cash for its growth needs.  ENLK reduced some equity needs by placing $50mm of units with its sponsor.  TLLP’s sponsor reiterated its commitment to taking units back in its next drop down.
Two winters ago, the power went out in my neighborhood for 5 days.  Temperatures were sub-20 degrees outside and drifted towards freezing inside.  Houses with backup generators in place were able to continue on in relative comfort, depending on how powerful the generator was.
Backup Generator
This MLP equity capital market blackout makes life difficult for all MLPs, but it serves as a reminder of how important it is to have backup sources of capital, either through balance sheet capacity, coverage or sponsor support.  As discussed last week, almost all MLPs have financial flexibility, but some have more than others.  This week’s price action was more differentiated than recent weeks and favored those MLPs with large backup generators, a welcome return to fundamental trading for stock pickers like us.
Status Update
MLPs finished October with a 9.7% total return, breaking a 5 month losing streak.  It was just the third positive month for MLPs since August of last year (a 14 month span).  October is typically a strong month for MLPs, which is consistent with the 3 month cycles MLPs have historically traded in where the first month of a quarter is typically strongest, with the second month when most distributions get paid being generally weaker.  The 9.7% return for the index made it the second best October on record (2011’s 10.3% return is the best October ever).
November has historically been one of the worst months for MLP performance, averaging negative returns since 1996 (May is the only other negative return month).  November has been split evenly between positive and negative months for the last 18 years, and the best ever November was 6.4%.  November’s odds of a positive return go up when October is positive: of the 14 years when October was positive, MLPs were up in November 10 of those years.
Winners & Losers
The top five performers all generated 10%+ returns for the week mostly driven by strong quarterly earnings results (MEP & PSXP) or operational updates/distribution announcements (SXE).  In the case of MPLX, supportive sponsor commentary related to the proposed acquisition of MWE was well-received while WNRL rallied perhaps in sympathy with other refining logistics MLPs.  Among the bottom five, FELP and HCLP reduced distributions, driving their under-performance.
NRP made it two straight weeks in the bottom 5, while MEP returned to the top 5 for a second straight week.
For YTD, VLP re-entered the top five replacing USAC while CEQP rallied out of the bottom five and was replaced by MCEP completing the upstream sweep.
General Partner Holding Companies
GPs underperformed LPs this week.  TEGP was the top performer on no specific news while WGP had in-line results and announced a new processing plant at WES.  WMB and ETE were among the top five but didn’t benefit as much from good results at WPZ.  No real negative company specific news to point to for the bottom five.
News of the (MLP) World
A bit of everything in MLP news this week, except of course, regular way public common equity issuance.  Growth projects, a buyout offer, a G.P. sale, several distribution announcements, and a few management changes.
Capital Markets

  • Kinder Morgan (KMI) priced public offering of 9.75% Series A Mandatory Convertible Preferred Stock Offering at $49.00 per share, raising $1.568bn in gross proceeds (filing)
  • EnLink Midstream, LLC (ENLC) announced purchase of 2.8mm units of EnLink Midstream Partners (ENLK) for proceeds of approximately $50mm (press release)
    • ENLC owns a 26.7% L.P. stake in ENLK following the transaction
    • Rather than announce a unit buyback program, ENLC went with the big slug in a private placement
    • Proceeds to ENLK will be used to fund growth capital expenditures at ENLK
  • NGL Energy (NGL) will pursue sales of some or all of its common unit ownership in TransMontaigne (TLP) (filing)
    • Currently NGL holds 3.2mm units of TLP (a 19.6% stake)
    • At today’s market prices, the proceeds to NGL for selling all of the units would be approximately $95mm
    • TLP trades at a substantial premium to NGL, making this an attractive way to raise capital

M&A / Growth Projects

  • Publicly-traded refinery corporation Western Refining (WNR) made offer for the remaining units of Northern Tier Energy (NTI), its variable-distribution refining subsidiary MLP (press release)
    • The proposed purchase price is comprised of $17.50 in cash and 0.2266 shares of WNR stock per unit, which represents a 15% premium to the 20-day average price prior to announcement
  • Crestwood Equity (CEQP) announced new pipeline projects in Delaware Basin and joint venture with private equity firm First Reserve Corp (press release)
    • CEQP announced open season for a Delaware Takeaway crude pipeline system, a 164-mile crude and condensate pipeline system originating at a new to be built CEQP terminal
    • CEQP also indicated that it is in negotiations with a large producer to anchor a large scale oil and condensate gathering system in the region
    • First Reserve Corp will contribute $500mm for a 50% stake in the JV, with CEQP obligated to contribute $500mm in later years for its 50% stake
  • Magellan Midstream (MMP) announced plans to expand its Galena Park, TX terminal on the Houston Ship Channel in a project that is expected to cost $115mm (press release)
  • Western Gas (WES) announced plans to develop a new 200mmcf/d processing natural gas processing plant (Ramsey VI) in the Delaware Basin area and open season for Delaware Basin Express Pipeline (press release)
  • Phillips 66 Partners (PSXP) announced acquisition of sponsor’s 40% interest in Bayou Bridge Pipeline JV with Energy Transfer (ETP) and Sunoco Logistics (SXL) for $70mm (press release)
    • The $70mm represents PSX’s cost in the JV so far
    • The Bayou Bridge pipeline will deliver oil from PSX and SXL terminals in Nederland, TX to Lake Charles, LA
  • Tesoro Logistics (TLLP) announced plans to construct new oil and produced water gathering system in the Bakken that is expected to cost $40-50mm (press release)
    • The system is backed by a 10-year, fee-based contract with minimum volume commitments
  • OCI Resources (OCIR) announced that its sponsor sold its G.P. and L.P. interests in OCIR to Ciner Enterprises (press release)
    • The G.P. and 73% L.P. interest owned by OCI Company was sold for $430mm
    • OCIR to change name to Ciner Resources LP
    • OCIR owns a controlling interest in OCI Wyoming, one of the largest producers of natural soda ash in the world

Distributions / Other

  • Distribution announcements
    • Increased: GLOP +10.0%, ETE +7.5%, EVA +6.7%, PBFX +5.4%, VTTI +3.9%, CNNX +3.6%, DKL +3.6%, SRLP +3.2%, WLKP +2.9%, ETP +1.9%, BPL +1.1%, EXLP +0.9%, USDP +0.9%
    • Reduced: LGCY -57.1%, FELP -55.3%
    • HCLP suspended distributions
  • Rod Sailor announced as CEO of Enable Midstream (ENBL) (press release)
  • Holly Energy Partners (HEP) announced that the President of its GP, Bruce Shaw, resigned, and will be replaced by current CEO Mike Jennings (press release)


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