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October 2, 2016

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Week Thoughts: MLPs Rise With Hot Air

MLPs extended last week’s rally into quarter-end, with a 0.9% gain for the Alerian MLP Index.  The equal weight version of the index performed better (and MLP Indexes that don’t have FGP performed better).  OPEC helped broad energy sentiment (for once) and the first presidential debate appeared to help broad equity sentiment, but there was plenty of M&A and financing action within the sector impacting MLP prices as well.
MLPs seem to be in a much better position this year compared with last year, but on a price basis MLPs are negative year over year, which shows how much worse things got from this point last year when it looked like MLPs had bottomed the first time.
OPEC Underpromises, then Promises to Overdeliver
Expectations were low heading into the meeting with OPEC, given that no one can remember the last time a positive outcome from a gathering of OPEC nations.  But just when expectations were at their lowest, OPEC surprised the market by not freezing production, but teased a production cut in a few months.
There is a scene in Dumb and Dumber when Lloyd catches up with Harry on a little motorcycle that he traded the van for, and Harry’s classic response sums up this week’s OPEC action.
Status Update: September
Another month has come and gone.  MLPs bounced back in September with a 1.9% gain.  October has historically been a stronger than average month (it was one of 3 positive months in 2015), so after choppy trading the last 3 months, maybe MLPs can break out in October ahead of more positive outlook for 2017.
MLPs also eeked out a slight gain for the quarter overall, which makes it two positive quarters for the Alerian MLP Index after an all-time long streak of 6 negative quarters.
Speaking of all-time worst, last year around this time was when it looked like MLPs had bottomed.  MLPs dropped 15% in September 2015 to close out the worst quarter ever for the MLP Index (-22%).  The last 3 days of September last year were two top 20 worst all-time days (-5.7% on 9/28/15, -5.8% on 9/29/15) followed by the 3rd best day of all time at +8.8% on 9/30/15, followed by a +9.7% October.
It didn’t turn out to be the bottom, but its worth reflecting on now that we’re starting to put real distance (in index points and time) between the extremes we lived through last year.
Poll Recap
Last week’s poll focused on potential negative themes of the sector and the sentiment associated with those themes being represented by current valuations.  The overwhelming negative theme chosen by you readers is the potential for lower for longer commodity prices (55%), but anti-oil & gas environmentals making midstream development costlier was second with 21%, and has definitely become a larger issue.
On sentiment, 52% were neutral (negative themes balanced against rewards offered by current valuations), 28% were bullish (negative themes overblown), 20% were bearish (potential negative themes not currently priced into MLP valuations).
Concerns over languishing commodity prices and the impact on MLPs and balanced sentiment help explain the choppy but not overly volatile trading the last few months.
News of the (MLP) World
A firehose of MLP transaction news this week, including the biggest public offering since May of this year, the biggest private placement of the year, two buy-ins of languishing MLP securities, and some large scale 3rd party M&A.  Expect news flow to continue to pick up over the next few weeks, ahead of distribution and earnings announcements.

  • Sunoco Logistics (SXL) priced public offering of 21.0mm common units at $27.00/unit, raising $567mm in gross proceeds (press release)
    • Largest equity offering since May of this year
    • Bought deal, priced at 7.4% discount to prior closing price, and traded up 1.9% from pricing in the next session
    • SXL will use the proceeds to partially finance the Vitol acquisition
  • Rice Midstream (RMP) announced private placement of 20.9mm unit at $21.50/unit, raising $450mm in gross proceeds (press release)
    • Price represented 7.8% discount to prior closing price
    • Transaction well-received, RMP traded up 4.0% in the next session
  • TeeKay LNG (TGP) announced pricing of 5.0mm of 9.0% Series A Cumulative Redeemable Perpetual Preferred units at $25.00/unit, raising $125mm in gross proceeds (press release)

Growth Projects / M&A

  • Columbia Pipeline Partners (CPPL) announced receipt of offer by TransCanada (TRP) to purchase remaining outstanding shares (press release)
    • TRP offered to pay $15.75/unit for all 53.8mm units in cash, which is $848mm
    • CPPL traded through the offer price, implying the board of CPPL will seek a better final price
    • If the deal closes by year end, CPPL will be among the MLPs with the shortest lifespans ever (see chart above)
  • Sunoco Logistics (SXL) announced $760mm acquisition of crude oil midstream assets in the Permian Basin from Vitol, Inc. (press release)
    • Assets include:
      • 2-million-barrel oil terminal in Midland
      • Crude oil gathering and mainline pipeline system in the Midland Basin
      • 50% interest (SXL already owned 50%) in the SunVit Pipeline that connects the Midland terminal into SXL’s Permian Express Pipeline
    • No details on the multiple paid for the assets
    • SXL’s sponsors ETE and ETP agreed to support the acquisition with $60mm of IDR waivers over the next two years
  • Rice Midstream (RMP) announced $600mm drop-down acquisition from Rice Energy (RICE) in conjunction with RICE’s acquisition of Vantage Energy (press release)
    • RMP intends to fund the acquisition with borrowings under its revolving credit facility and potential equity and debt financings prior to closing
    • Issuance of up to $250mm of equity directly to RICE is also an option, although that doesn’t seem necessary following the PIPE above
  • Shell Midstream (SHLX) announced $350mm drop-down acquisition (press release)
    • SHLX will acquire an additional 20% interest in Mars Oil Pipeline and a 49% interest in Odyssey Pipeline from Shell
    • The assets were acquired at an announced 2017 EBITDA multiple of 8.4x, implying around $42mm EBITDA
  • Cheniere Energy Partners LP Holdings, LLC (CQH) received buyout offer from Cheniere Energy, Inc. (LNG) for$21.90/unit, a 3% premium over prior closing price (press release)
    • LNG owns 80.1% of the shares outstanding of CQH
  • Western Gas (WES) announced a new agreement with a Shell subsidiary to gather and process natural gas through its midstream assets in the Delaware Basin (press release)
    • Under the terms of the agreement, WES will provide the Shell subsidiary (SWEPI LP) with gathering, processing and related services under a 20-year, fixed-fee agreement
  • Crestwood Equity (CEQP) announced long-term gas gathering agreement in the Permian – Delaware Basin with a subsidiary of Shell (press release)
    • CEQP will develop and operate a gas gathering system in Shell’s position in the Permian at a cost of $180mm
    • The system will be developed within the previously announced 50/50 JV with First Reserve, whereby First Reserve provides 100% of the initial funding for the system
    • Shell’s subsidiary (SWEPI LP) will dedicate 100,000 acres for gas gathering rights, and retains an option to purchase up to 50% of the system prior to September 2017


  • Ferrellgas (FGP) announced Stephen Wambold resigned, to be replaced by FGP founder James Ferrell would replace him (press release)
  • The Williams Companies (WMB) announced two additional new board members (press release)
    • New board members are energy veterans Stephen Chazen (former CEO of Occidental) and Peter Ragauss (former CFO of Baker Hughes)
  • SemGroup Corp (SEMG) announced approval by all stakeholders for the merger with Rose Rock Midstream (RRMS), which subsequently closed on 9/30
    • RRMS existed as a public MLP for just 4.8 years (see above for shortest midstream MLP lifespans)

Winners & Losers
Recent AMZ addition RMP had a very strong week, adding midstream assets alongside its sponsor’s upstream acquisition, then financing that purchase with a very large private placement.  The rest of the top 5 operate assets that float, helped by oil price strength and maybe an improved outlook for global oil activity in a world where OPEC is supportive of prices.
FGP was the big story on the downside, taking a 30.8% haircut.  FGP retail investors, conditioned to buy dips in a stock that seemed to oscillate between $17 and $23/unit since 1995, were caught off guard by the magnitude of the impact of FGP’s failed midstream gamble.
MEP made the bottom 5 for a second straight week.
Year to Date Leaderboard
High growth drop-down MLPs, which have dominated the bottom 5 all year, have started to trade a bit better.  PSXP escaped the bottom 5, while SHLX and DM climbed a few spots.  FGP dropped all the way to second worst for the year.  No changes in the top 5, although after the RRMS deal closed this week, we’ll take it off the list for next week.
General Partner Holding Companies
As you’d expect in a strong week for oil prices, G.P.’s outperformed the MLP sector.  SEMG rallied nearly 9% and will be removed from this chart to join fellow midstream corporations KMI (+5.4% this week) and TRGP (+4.2%), now that it no long has a wholly owned MLP subsidiary (SEMG will continue to own a piece of NGL’s GP).

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