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February 23, 2014

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Week Thoughts: MLPs Stumble

After 6 straight positive weeks that took the Alerian MLP Index on a price basis near its all time high, MLPs were unable to breakout and the index tumbled 1.5% this week.  The S&P 500 (-0.1%) continued to gain on MLPs with a second consecutive week of out-performance.  Large cap diversified MLPs (that dominate the Alerian MLP Index) were down more than others, as shown in the variance of the MLP Equal Weight Index performance this week.  Heading into the final week of February, MLPs are slightly better than flat for the month so far, and slightly better than flat for the year (inclusive of distributions) in a slippery market environment.
Commodity prices were mostly higher, although the spot price for Mt. Belvieu propane was down 13.2% and Permian crude oil price (not pictured below) was also down.  Front month natural gas futures spike an amazing 18.6% week over week to close well above $6.00/mmbtu.  Weak propane prices and higher natural gas prices combine to generally reduce processing and fractionation margins, but the forward curve suggests that the near-term natural gas spike (which seems to have lasted a while now) will be short lived and will rationalize a bit (maybe from its current downhill ski slope shape to a gentler ski school run) once this irrational winter finally wanes.
Weekly MLP Review_2-21-14
Earnings were once again in focus this week, with the Energy Transfer (ETE/ETP/SXL/RGP) and Williams families (WMB/WPZ/ACMP) reporting results for the 4th quarter of 2013.    No real surprises among those names.  WMB’s Bluegrass Pipeline project was delayed 6-12 months (although not canceled entirely).   A lack of bad news proved to be a positive for WMB’s share price, which was up 3.7% on the announcement.   WPZ was down, however, perhaps due to pending (and growing) equity financing needs to fund announced projects.
This dramatic bifurcation within the same family of companies highlights the ongoing trend in trading for GP (and incentive distribution rights) holding companies and their underlying MLPs.  Sell-side equity research analysts may have done too good a job spreading the gospel of IDRs and total return in recent years, to the point where now trading in public GP holding companies is disconnected with its underlying MLP, and investor focus has shifted away from the base MLP businesses to the parents.  The recent price charts of  TRGP/NGLS, PAGP/PAA, WMB/WPZ, OKE/OKS, ETE/ETP show the trend much better than I can explain it.  One of those is highlighted here.  It may be starting to get awkward for MLP management teams that typically have more of their wealth tied up in the GP holding companies than in the MLP.  It will be interesting to see if and when the narrative changes for certain equity research analysts from growth back to value.  Growth remains king of the hill for now, and GP holding companies have that in spades, as do the drop down MLPs that are leading the sector in returns year to date (like PSXP and VLP).
Update on Risk Poll
Thanks to all who participated in our latest poll a few weeks ago, where I asked what you thought was the single biggest risk to MLP performance over the next 12 months.  The results are summarized below.  Rising interest rates remain the biggest single concern, although rising rates certainly weren’t insurmountable last year when the US 10-year interest rate was up 127 basis points and MLPs produced great returns.

Risks Poll Summary

The second and third most popular risks below, general stock market sell-off and general economic slowdown, are similar in that they are circumstances outside the energy space that could impair MLP performance.  Survey data can be like a Rorschach, but what I see in the results is that my readers are bullish on secular energy themes that are driving opportunities for MLP cash flow growth, but remain wary of broad macro-economic factors that may impact MLPs ability to attractively finance that growth.  What is less of a concern, based on the above chart, is the possibility of someone crashing the MLP party with tax reform or some other energy legislation that might curtail production.
Winners & Losers
ATLS and APL released 4Q results that were below expectations and also lowered guidance for 2014, which the market did not appreciate, at least until Friday when APL bounced 4.0%, which was enough to escape the bottom 5 list below.  GEL reported results that included a series of one time issues (again) that have investors spooked, but analysts almost universally believe GEL will have no trouble raising distributions at its usual 10% again in 2014, helped by growth of volumes on the CHOPS pipeline and by the lack of IDRs.  Weather issues in the Permian caused LGCY to miss expectations in their earnings release this week.  Shipping MLPs in general were weak, but beyond a few downgrades, I couldn’t find any company-specific news that would account for the outsized declines in GMLP and NMM.
On the positive side, PSXP continues to defy gravity, up another 10.3% this week, making it 2 straight weeks of double digit gains.  The read-through continues for VLP, which has a very similar business model to PSXP, but is a few months earlier in its lifecycle.


On the year to date chart, PSXP is comfortably ahead of the pack now, overtaking CELP, which was own 6.7% on the week.  No changes among the constituents in the bottom 5, but NKA crept a few spots higher this week.


News of the (MLP) World
This week’s $540mm KMP overnight transaction marked the first significant (>$150mm) public equity offering of primary units of an MLP so far this year.  Mid-February is the latest point in a year that we have gone without a primary equity offering of at least $150mm in the last 8 years at least (my equity database goes back to 2005).  The prevalence of ATM equity distribution programs in place and the large amount of equity raised by MLPs in 2013 has slowed down equity issuance materially year to date.  If you’re tired of me saying that, sorry, but it’s a fascinating development for a sector whose capex plans have not slowed down.
Speaking of planned capex, there were several announcements on the organic capex front this week, highlighting continued opportunities to deploy capital.  No M&A this week, however.
One more thing, Barron’s published an article highlighting the bear case for Kinder Morgan Energy Partners (KMP).  The article’s primary source was the Hedgeye analyst Kevin Kaiser, who has recently had success with his sell recommendation and campaign against BWP several months ago, which dropped 45%+ in price last week.  This article on KMP is basically the analyst’s victory lap after his success with BWP, but there may be some added volatility in KMP units this week.  MLPs are almost becoming a regular thing at Barron’s after last week’s MLP Round Table discussion, maybe they should get an MLP column going…



  • Kinder Morgan Energy (KMP) prices public offering of 6.9mm units at $78.32/unit, raising $540.4mm in gross proceeds (press release)
    • Bought deal, re-offered and priced to the public at 2.0% discount to prior close, and closed up 0.3% from pricing the next trading session
    • KMP are the masters of the bought deal, and it is KMP’s usual method for executing public equity offerings.  The underwriters acquire the units at a discount and then re-offer them to the public.  The result is a public offering price that is at a very tight discount to prior close.
      • KMP has now executed 8 such deals since the beginning of 2009 for total gross proceeds of $2.9bn at an average discount to the public of 2.1%
      • When other MLPs execute bought deals, the discounts offered to the public are typically 3.5% to 4.5%.  I’m not entirely sure how KMP manages the tight discount, but its very efficient.
  • Markwest Energy (MWE) files shelf registration statement (S-3) to register up to $1.2bn of common units (filing)
    • Likely to be sold over time via the ATM, given the recent capital markets strategy of MWE

M&A / Growth Projects

  • Genesis Energy (GEL) announces new Gulf Coast import / export terminal in Baton Rouge, LA (press release)
    • Project expected to cost $150mm to construct and is expected to be complete by 2Q 2015
    • Terminal will be located on ~90 acres of land near the Port of Greater Baton Rouge and will be connected to the port’s existing deepwater docks on the Mississippi River
    • GEL will construct 1.1mm barrels of tankage for storage of crude oil, intermediates and/or refined products with the capability to expand to provide additional terminaling services to its customers
    • Terminal will also be connected to ExxonMobil facilities in the area as well as to GEL’s previously-announced Scenic Station rail facility
  • Williams Partners (WPZ) announces binding commitments for 1.7mm bcf/d of firm natural gas pipeline capacity on its proposed Atlantic Sunrise Expansion (press release)
    • Pipeline would significantly expand Transco to create southern market connection for growing Marcellus shale supplies
    • 9 shippers have committed for 100% of the 1.7 bcf/d of capacity for 15 years
    • Pipeline is expected to be in service by the second half of 2017, assuming timely regulatory approvals
    • WPZ’s net investment for the pipeline expansion feeis expected to be $2.1bn
  • Energy Transfer (ETP) announces long-term agreement with XTO Energy to provide gathering and processing services in the Permian Basin (press release)
    • To support the agreement, ETP will construct a 130 mmcf/d cryogenic processing plant (expandable to 200 mmcf/d), and will build over 100 miles of high pressure and low pressure gathering pipelines in Glasscock County, Texas
    • New plant and gathering lines expected to be in-service by 3Q 2014
  • EQT Midstream (EQM) announces long-term agreement with Range Resources Corp. to provide midstream services in the Marcellus shale (press release)
    • Agreement includes fee-based, 10-year minimum volume commitment for gathering and transmission services
    • EQM will invest approximately $30mm in gathering infrastructure and $25mm in a transmission expansion project to support the agreement
    • The transmission expansion will add 100 BBtu/d of capacity to EQM’s transmission system in Southwestern Pennsylvania and is expected to be in service by November 2014
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