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November 13, 2016

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Week Thoughts: MLPs Trumped Up...Trickle Down

The stock market experienced shock, then awe overnight Tuesday, erasing a massive initial drop to finish up huge Wednesday.  MLPs rallied bigly on Wednesday and Thursday, trading counter to a selloff in REITs and utilities due to the sudden increase in interest rates based on the expectation of Trumpflation from the assumption of fiscal stimulus and lower taxes.  Euphoria among Energy Transfer’s MLPs may have helped enthusiasm for MLPs more broadly.  That enthusiasm faded by Friday, when MLPs dropped 1.2% to close the week with a 3.7% gain overall.
weekly_11-11-16
Oil dropped 1.9% week over week, challenged by dollar strength and the lack of positive fundamental data points or noteworthy headlines out of OPEC.  Natural gas fell again, and probably will continue to struggle until winter shows up in force.  Expect oil, natural gas and propane to remain in limbo until the OPEC announcement or until sustained cold weather hits North America.
MLPs in Trump’s America
Donald Trump’s election is a game changer on many levels.  It provides hope for plagiarists, job security for Alec Baldwin, and unrealisticly high hopes in coal country.   It also appears Trump, who first gained fame in the 1980s era of high interest rates, is making savings rates great again.  Most relevant to MLPs, though, it seems the creeping regulatory risks from a meddlesome executive branch doesn’t have to be a risk factor for a while.
With a pro-energy regime assured, the focus should return to fundamentals and when those fundamentals will be great again.  What the last few months of oil price volatility and a choppy 3Q earnings season have shown us is that fundamentals remain challenged for MLPs.
Oil, natural gas and NGL inventories remain at historic highs, and while producer activity has resumed, the impact of new drilled and completed wells is isolated and still pending.  All eyes now shift back to (1) the OPEC meeting in a few weeks, (2) on producer 2017 capital plans over the next few months, and (3) hopefully on more consolidation in the midstream sector.
Poll Recap: How Did Earnings Grab You?
Last week, I asked how you felt 3Q earnings impacted your outlook for MLPs.  The most popular choice was “no change” at 52%, or basically recovery is continuing, but taking time.  Only 15% of you thought 3Q results caused a deterioration in MLP outlook.
Its too much to expect sequential quarterly gains across the MLP world for a seasonal and diverse industry engaged in a bottoming and rationalizing process.  The last big MLP complex reported results this week. Energy Transfer Family results reflected ongoing weakness in commodity prices and volumes, but with signs of improvement on the margin, on par with the earnings season overall.
The MLP price recovery peaked at the end of September, and the Index has declined 4.5%, including distributions (-6.3% without distributions).  If earnings season didn’t negatively impact everyone’s outlook for MLPs, and if we had a surprise election outcome in favor of the energy sector, the selloff seems unwarranted, even with the recent spike in interest rates.
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The MLP bounce earlier this year may have seemed like it went too far too fast, and maybe there is a hesitation to buy after such a prodigious rally and so recently after being burned by the sector.  But, MLPs have decoupled from oil prices since the middle of the summer, and the recent fade and pre-election jitters is a chance to get involved with MLPs ahead of what should continue to be a positive recovery story.
Winners & Losers
ETP, SXL dominated post-election trading as was to be expected after the unexpected happened in the election.  PSXP showed up in the bottom 5, despite the fact that PSX is a part owner of the Dakota Access Pipeline.  Pending partners in the project EEP and MPLX also didn’t have much of a pop on the announcement. SUN was the worst performer in the sector, apparently an improved outlook for the broader Energy Transfer family didn’t bleed into read through of potential sponsor support for SUN.
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NRP led the way again this week, up another astonishing 19%, maybe on a brighter outlook for coal in Trump’s America.
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Year to Date Leaderboard
Year to date, MLPs are back above 10% total return, and two MLPs have achieved 200%+ returns in 2016. Down the home stretch we go with just 33 trading days remaining in the year, or 13% of the year.
top5bottom5_11-11-16_ytd
G.P. Holding Companies and Midstream Corporations
ETE was the clear winner of the week, as ETE’s decision to delay earnings release until after the election proved to be a masterstroke for masking an unimpressive quarterly result.  Outside of ETE, other big winners seemed to just be reversals of big losses last week, rather than any thematic trade across the group.
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News of the (MLP) World
SXL announced a new JV with a big name everyone knows, but without much additional detail, sounds kind of like the U.S. election.  Outside of that JV, transactions were scarce on the week, as MLPs took a pause from the capital and M&A markets after woeful trading the last few weeks and expected election volatility.
News-of-the-World
Growth Projects / M&A

  • Sunoco Logistics (SXL) announced new joint venture with ExxonMobil (XOM) that includes Permian Basin pipelines (press release)
    • SXL will contribute its Permian pipelines (Permian Express 1, Permian Express 2, Permian Longview, and Louisiana Access)
    • XOM will contribute its Longview to Louisiana and Pegasus pipelines, Hawkins gathering system, and idle pipeline in Southern Oklahoma, and its Patoka, Illinois terminal
    • SXL will own 85% of the joint venture, and XOM will execute a preferred shipper agreement with JV

Equity

  • Sanchez Production Partners (SPP) announced public equity offering of 8.8mm common units with a range of $16-18/unit, seeking to raise up to $150mm in gross proceeds at the midpoint (press release)
    • SPP is a small-cap MLP, subsidiary of Sanchez Energy Corp, and closed the week $15.35/unit
  • USD Partners (USDP) filed form S-3 to register 1.7mm units for selling shareholders (filing)
    • Selling unitholders acquired the units as part of USDP’s acquisition of Casper Crude in 2015
  • Delek US Holdings (DK) announced approval of purchase of up to $30mm of its subsidiary MLP DKL (press release)
    • DK owned 59.7% L.P. interest in DKL as of 9/30/16
  • Semgroup Corp (SEMG) filed equity distribution agreement to sell up to $300mm in common shares at-the-market (filing)
  • Western Gas Equity (WGP) filed S-3 to register 50mm units for selling unitholder Anadarko Petroleum (filing)
    • Would reduce Anadarko’s ownership from 82% down to 59%

Energy Transfer News

  • ETP/ETE news:
    • DAPL easement approval expected to be granted in a matter of days (Politico)
      • Administration denies Politico report (Politico)
    • Like MPLX, ETE is taking a closer look at IDRs and a simpler structure
      • CEO Kelcy Warren: “you can read between the lines…this is heavy on our mind these days and we’re looking at options”
      • Warren on 2Q call: “we would be open-minded to a consolidation down the road, but…it’s not something that we’ve seriously considered.”
    • Rover shipper Ascent raised $800mm in equity, reducing substantially what was seen as a large counter-party risk
    • ETE is Working on project financing for the pipeline, which is expected to be in-service by November 2017
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