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September 24, 2017
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MLPs declined 1.1% this week, giving up last week’s minor gains. MLP weakness was likely due to the nearly $1.4bn of equity issued, even though only $127mm was issued in a public offering. Oil prices broke back above $50/bbl and natural gas slipped back below $3.00/mmbtu. NGL prices outpaced both major commodities, and propane continues to standout, up nearly 30% on the year vs. negative price changes in oil and gas. Oil prices above $50/bbl have generally been the dividing line between good and bad MLP performance, and if oil can hold $50, sentiment towards MLPs should improve.
If Equity Happens Without a Public Offering, Does it Still Count?
This Fall, I’ve given in to pleas for volunteers and have been coaching my first-grade son in what we nominally call soccer. There are no goalies, just four players on a side and each game is 16 minutes long. The goal of rec soccer at this level is to have fun, my goals as a coach is to minimize breakdowns (by the boys and myself) and to try to make sure all four players are engaged in the game, which gets very hard when the ice cream truck shows up. At this point, I’d rate myself as a coach ahead of Rodney Dangerfield in “Ladybugs” and well behind Will Ferrell in “Kicking and Screaming”.
Oh, and we don’t keep official scores. But of course, each boy that’s paying any attention knows the score of each game they play and know whether they won or lost.
Which brings me back to MLPs. Lately MLPs have been successfully tapping institutional capital directly on ATMs and through private placements at very skinny discounts. The trend is positive for the individual MLPs that do the deals (SHLX, BPL and PSXP), but so far it hasn’t had a broad positive impact on the sector.
The reason is the institutions are funding these primary equity issuances with funds that might have come from or might have been otherwise invested in other MLP units. We are still in a market where primary issuance is largely funded within a closed loop of available capital (i.e. selling MLP units to buy other units). We are all keeping score.
Context for IPO this Week
Below is the chart of the last 20 MLP IPOs, including the one that priced this week. Early on, it seems as though interest in OMP is fairly limited. It was the highest yielding midstream MLP since Sprague Resources in 2013, and before that next MLP with a higher yield at IPO was Holly Energy in 2004.
Takeaways from the above chart:
Winners & Losers
DM continued its ascension this week, leading all MLPs higher on no news. DM is now up 30.8% in the last month. Clearly the market has gained confidence in the capital markets-reliant business plan DM plans to execute, but that confidence hasn’t spread into many other drop-down MLPs so far. PSXP traded very well Friday (and quite well Thursday as well before the news broke…) on actual news that hit Friday morning.
WES made a rare appearance in the bottom 5, perhaps weaker on news that APC would be directing more of its excess capital to its shareholders and not to the development of assets that might benefit WES over time. FGP and OCIR gave back some of last week’s gains. On the year to date chart, NGL escaped the bottom of the sector, replaced by TOO.
General Partners and U.S. Midstream Corporations
GPs and midstream corps were roughly in-line with the MLP Index as a group, but only three of the group were positive. AROC was up 5%+ for a second straight week, helped by recent oil price strength. TEGP’s week to week volatility on no news is disconcerting, but TEGP went from best to second worst this week.
Canadian Midstream Corporations
Canadian midstream performance was unusually varied this week. Upgrades sparked some rotation away from the big cap players and into year-to-date under-performers Keyera and Inter Pipeline.
News of the (MLP) World
It’s no surprise that capital markets activity is ramping up, but it’s been a positive surprise to see so many deals happening outside the traditional capital markets. We got two additional off-market MLP equity issuance this week, a sign of the times. The private deals are still going to large MLP money managers, so not totally off-market, but the deals are causing much less disruption for issuers. The one public markets deal was the small Oasis Midstream IPO that highlighted weakness in the traditional avenues for MLP capital raising. Also noteworthy were the private equity deals announced this week, signaling plenty of private capital available to those willing to develop midstream assets in the Permian.
Capital Markets
Growth Projects / M&A
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