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May 10, 2015

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Week Thoughts: MLPs Stifled by Equity, Earnings and Taxes

MLPs crapped out this week, ending their positive streak at 7 weeks.  The Alerian MLP Index was down 2.4%, while the more smaller-cap weighted equal weight version was down even more (3.9%).  MLPs slipped back into negative territory for the year overall.  Heavy equity issuance, some weaker earnings releases, IRS private letter ruling noise, and interest rate volatility pushed MLPs lower this week.
Weekly Review_5-8-15
The U.S. 10-year treasury interest rate shot higher early in the week, peaking at 2.24% Wednesday before drifting down to 2.15%, as the markets calmed down after the payroll number on Friday.  Interest rate concerns seemed negatively impact utilities and MLPs.  Oil prices made it 8 straight positive weeks with a marginal gain, but it wasn’t enough to save MLPs from yield-based equity carnage this week.
Winners & Losers
The biggest loser of the week, WLKP, was the most directly impacted by the proposed PLR regulations.  It appears that in their current form, the new regulations would render their entire business non-qualifying.  The rest of the bottom 5 performers were largely earnings related, with GLOP being the exception.
On the positive side, I put TEGP on the list for this week, even though I usually don’t highlight GPs, to highlight its IPO pop in an otherwise short list of big gainers.  SRLP’s blowout quarter (including 5.9x distribution coverage) and raised guidance helped it lead the way this week.  TLLP’s big quarter helped it land on the top 5.
KNOP popped 10.3% on Friday to finish flat for the week, otherwise it might have been 2 weeks in a row on the bottom 5 list.  SRLP’s big gain came on the heels of a bottom 5 showing last week, and vice versa for TLP.  Also worth noting that CEQP was down 13.8%, 11.6% including distributions, after its merger announcement.
Year-to-date, LRE climbed into the top 5, displacing NMM.  WLKP dropped near the bottom of the sector, displacing CNNX from second worst and squeezing CAPL out of the bottom 5 altogether.
News of the (MLP) World
My inbox exploded this week amidst all the transactions, IRS news and earnings.  Two GP IPOs, a GP merger, multiple drop downs and a few project announcements make this the busiest news week of the year so far.  With earnings season largely behind us, expect equity offerings to resume their pre-earnings breakneck pace.

  • Tallgrass Energy GP, LP (TEGP) priced IPO of 41.5mm units at $29.00/unit, raising $1.2bn in gross proceeds (prospectus)
    • Priced $2.00/unit above the high end of the range
    • Opened at $30.90/unit and closed at $31.75/unit on its first trading session, up 9.5%
    • TEGP owns G.P. interest, IDRs and 20mm units of Tallgrass Energy (TEP) and will be treated as a corporation for tax purposes
  • EQT GP Holdings launched IPO of 20.0mm common units, seeking to raise $450mm at a midpoint price of $22.50/unit (1.6% yield) (prospectus)
    • EQGP owns G.P. interest, IDRs and 21.8mm common units of EQM and will be treated as a partnership for tax purposes
    • Expected to price 5/11 (Monday)
  • Summit Midstream (SMLP) priced public offering of 6.5mm units at $30.75/unit, raising $199.9mm in gross proceeds (press release)
    • One-day marketed offering, with a file-to-price decline of 5.6%
    • Proceeds to be used to fund the drop down acquisition announced this week
  • Targa Resources Partners (NGLS) filed equity distribution agreement to sell up to $1.0bn worth of common units at the market (filing)
  • Mid-Con Energy (MCEP) filed equity distribution agreement to sell up to $50mm worth of common units at the market (filing)


  • EnLink Midstream (ENLK) priced of $900mm of senior notes (press release)
    • $750mm of 4.15% notes due 2025 at par
    • $150mm of 5.05% notes due 2045 at par
  • PBF Logistics (PBFX) priced $350mm of 6.875% senior notes due 2023 at par (press release)

M&A / Growth Projects

  • Crestwood Midstream (CMLP) and Crestwood Equity (CEQP) announced a merger (press release)
    • CMLP unitholders will receive 2.5 units of CEQP for each unit of CMLP, a price that represented a 17% premium to the closing price on Tuesday
    • The announcement was initially well-received, but CEQP traded down shortly after the announcement and dragged CMLP with it, both stocks underperformed the MLP index for the week
    • Transaction will eliminate the IDRs in exchange for boosting CEQP distribution coverage
    • One curious side note: on the call announcing the transaction when CEO Bob Philips cited other MLPs that in the past had eliminated IDRs through mergers (EPD, BPL, KMI, MMP were all mentioned), he failed to mention that CEQP itself in its prior incarnation as Inergy (NRGY) bought out its public GP (NRGP) in 2010
  • Energy Transfer (ETP) announced multiple new projects this week
    • $450mm new fractionation facility (ETP’s fourth) at Mont Belvieu (press release)
    • $1.3bn Mexican pipeline projects (noted in earnings press release)
    • $1.4bn Revolution Project in Marcellus
    • $370mm acquisition of Exxon Mobil King Ranch NGL logistics assets
  • Sunoco Logistics (SXL) announced that it will participate in ETP’s multi-billion dollar Bakken Pipeline project at an ownership level of 30% (press release)
    • SXL anticipates reaching agreement with ETP to become the operator of the pipeline
  • Summit Midstream (SMLP) announced $255mm drop-down acquisition (press release)
    • SMLP to acquire the Polar & Divide crude and produced water gathering systems and transmission pipelines located in the Bakken
    • SMLP will have a 6 month option to acquire a crude oil transmission project under development for an additional $35mm
    • The price represents a multiple of 7.8x 2016 projected EBITDA, including the $35mm option and $75mm of growth capital
  • PBF Logistics (PBFX) announced $143mm drop down acquisition (press release)
    • PBFX will acquire the Delaware City Products Pipeline and Truck Rack from sponsor PBF Energy
    • Transaction to be funded with $112.5mm in cash and $30.5mm in units
    • $14.3mm in EBITDA expected in next 12 months, supported by a 10-year agreement with the sponsor that includes minimum volume commitments
  • Cypress Energy (CELP) announced acquisition of 51% in Brown Integrity for $11.2mm (press release)
    • Brown’s business (which apparently is MLP-qualifying) is hydrostatic testing


  • The IRS released unpublished proposed rules that appear (I’m not a tax attorney) to have negative implications for certain MLPs operating under already-issued private letter rulings (read it here)
    • The proposed rules would allow 10 years for MLPs with income from newly non-qualifying sources to manage their way out of those assets before they would be taxed
  • Emerge Energy (EMES) announced new CFO Jody Tusa (press release)
    • Prior CFO Robert Lane resigned for personal reasons


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