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March 5, 2017

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Week Thoughts: MLPs SNAP Back, Pivot

MLPs bounced back this week, despite spiking interest rates and some oil volatility.  MLPs finished up 1.1%, riding the wave of optimism that took over the market on Wednesday following President Trump’s tempered joint session of Congress speech. No equity deals and execution of previously announced M&A also probably helped MLP performance.
Weekly_3-3-17
Oil hasn’t closed a week below $53/bbl since the last week of November.  Complacency? Maybe.  But it feels much better than extreme volatility.  Lighter NGL prices were hammered this week, in stark contrast to both natural gas and oil prices, as the products at the light end of the barrel develop markets of their own.  EPD controls a big part of the U.S. NGL value chain, and their views on those developing markets will be a major part of the EPD analyst day event next week.
Pivot to Execution, Where’s the Bar?
With 4Q earnings out of the way and 2017 guidance released for most in the midstream sector, the next few quarters will feature MLPs pivoting from talking about expectations to delivering on them.  The degree of difficulty for meeting expectations depends on where the bar has been set.
MPLX has laid out a simple plan that requires almost no cooperation from the market, given that MPC is taking back all the equity for multiple large drop-downs throughout the year.  This week’s drop-down was right in-line with expectations laid out just two months ago.  In other words, it’s a very low bar.
The market’s exuberant response to the MPLX drop-down was reminiscient of the praise the market showered on President Trump for what was a pretty standard speech.
In other cases, the bar is set a bit higher.  Midstream players may need cooperation from commodity markets, capital markets, producer activities or in some cases from eager private infrastructure investors willing to JV a massive controversial pipeline with an upfront promote payment.  It’s not just about promises made and promises kept, it’s about making sure the market isn’t embellishing your promises so there is a let down when you deliver on your promises.  But that’s the tricky dance of the market, like trying to carry a giant couch up a tight staircase.
PIVOT
Status Update
MLPs finished February with a 0.4% positive return, just enough to run its streak of positive months to 4.  If March finishes positive or even down slightly, the quarter will come in better than the last two quarters.
Monthly_2-28-17
Historically, March has been a mixed month with average returns of 0.7% since 1996, and has been positive just 11 out of 21 prior months.  April has been more consistent with 19 out of 21 positive, including 12 in a row.
Winners & Losers
Wide divergence in performance in MLP land this week.  Big losers from last week FGP and CNNX led the way this week.  OKS continues to be coated in Teflon, it seems, rallying after posting weaker results in 4Q.  On the downside, MMLP’s fell back to earth after last week’s pop.  I’m not sure what happened with SDLP, to be honest, I’ve taken it off my radar.
Top5Bottom5_3-3-17
Top5Bottom5_3-3-17_chart
YTD Leaderboard
OKS moved up a few spots to 3rd place for the year so far among MLPs, but it won’t be an MLP much longer. NBLX extended its lead.  EEP, SPH and USDP continue to pace the downside of the sector, joined this week by CNXC and SXCP.
Top5Bottom5_3-3-17_YTD
Top5Bottom5_3-3-17_YTD_chart
General Partners & Midstream Corporations
OKE led all midstream corps and GPs, followed closely by WMB and PAGP.  After two straight weeks as the top performer, TEGP took a break from the top 5.   TRGP rebounded from last week’s decline.
Top5Bottom5GPs_3-3-17
Top5Bottom5GPs_3-3-17_chart
News of the (MLP) World
After last week’s flurry of capital markets action, MLP announcements turned to execution on M&A already included in guidance for KMI, MPLX and TCP, along with another simplification that will eventually remove another MLP from the universe less than 3 years after its IPO.
News-of-the-World
Capital Markets

  • Sabine Pass Liquefaction priced $1.35bn of 4.20% senior notes due 2028 at 99.903% of par (press release)
    • Sabine Pass is owned by Cheniere Energy Partners (CQP)
  • Shell Midstream (SHLX) filed updated equity distribution agreement to sell up to $300mm in common units at-the-market (filing)
    • SHLX also announced new $600mm, 5-year credit agreement with Shell Treasury Center (press release)
  • Summit Midstream (SMLP) entered into an equity distribution agreement to sell up to $150mm of common units at-the-market (filing)

Growth Projects / M&A

  • VTTI Energy (VTTI) received buyout offer from sponsor VTTI B.V. for $18.75/unit, representing a 3% premium over the 30 day VWAP (press release)
    • Reasons for the proposed merger are VTTI’s units underperforming expectations, no future planned dropdowns, and a current attractive valuation
    • VTTI went public in July 2014 at $21/unit, and through Thursday before the announcement had produced total return of 1.3% vs. -20.9% for the MLP Index
  • MPLX announced $2bn drop-down acquisition from sponsor Marathon Petroleum (MPC) at 8.0x EBITDA multiple (press release)
    • The assets include
      • 62 light product terminals – 24mm barrels of storage capacity
      • 11 pipeline systems totaling 604 miles
      • 73 tanks – 7.8mm barrels of storage capacity
      • A crude oil truck unloading facility at MPC’s refinery in Canton
      • 8 natural gas liquids storage caverns – 1.8mm barrels of capacity
    • Dropdown will be financed through the issuance of $504mm in MPLX equity to MPC and $1.5bn in cash from recent debt offerings
  • Kinder Morgan (KMI) announced sale of 49% interest in Elba Liquefaction company to EIG Global Energy Partners Investment Funds (press release)
    • Payment of $555mm to KMI includes (1) $385mm for reimbursement of prior capital expenditures, excluding capitalized interests, and (2) $170mm in promote payment
    • EIG will fund its share of future capex necessary to complete construction of this $1.3bn project, excluding capitalized interests
  • TransCanada (TRP) announced an offer to sell 49.3% interest in Iroquois Gas Transmission Systems and 11.8% interest in Portland Natural Gas Transmission System (PNGTS) to TC Pipelines (TCP) (press release)
    • TRP’s board has approved both sales
    • Proposed financial terms were not disclosed
  • Enbridge and Spectra Energy completed merger (press release)
    • Full update on plans for the combined entity to come in 2Q, and presumably sometime between now and then ENB will provide an update on the EEP situation
  • American Midstream (AMID) announced connection into Dakota Access Pipeline (press release)
    • AMID will be able to deliver an incremental 20k bpd to the market via DAPL
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