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May 31, 2015

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Week Thoughts: MLPs Under Water

MLPs underperformed the S&P 500, utilities and oil prices this week, in a sustained hangover that coincided with incessant rainfall and flooding across Texas, making it an all-around gloomy post- MLP conference hangover week.  The Alerian MLP Index (AMZ) declined 2.7% this week, falling 3 of the 4 trading days.  Large cap MLPs underperformed (AMZE down just 2.0%).  U.S. 10-year interest rate declined 9 basis points this week, but it didn’t help.  There was very little MLP-specific news to drive MLP stock price movements this week, and MLPs didn’t rally Friday with the oil price rally.
Weekly Review_5-29-15
Oil prices were volatile during the week falling early in the week on news of further reduction in U.S. rig count.  For the week overall, oil finished 0.9% higher, and back above $60/bbl.  Natural gas prices continued to slide (-8.2%).  There is increasing chatter about NGL prices, which may have contributed to MLP weakness this week.  Propane hit a 52-week low on Wednesday at $0.3825/gallon, its lowest level in at least 7 years, but finished the week 2.6% higher than last week.  Ethane fared a bit better, but has yet to break above $0.20/gallon since late February.
Under Water
Status Update
At the end of last month’s rally, I noted that since August, we have yet to have back-to-back positive months, and we still haven’t.  May’s performance was helped by the WPZ transaction, but large cap MLPs suffered overall, and the MLP Index declined 3.6% in May.  MLPs have produced positive returns for the second quarter overall, but have a ways to go to break through into positive territory.
Status Update_5-31
But, we also haven’t had two negative months in a row since January.  Floating sideways on a see saw is definitely preferred to sinking.  Also, June has been a seasonally smooth month in recent years.  For five years in a row, MLPs have had positive returns in June, the second longest active streak of any month, so I’m optimistic June will continue recent trends.
Winners & Losers
No double digit winners this week, but some MLPs seemed to benefit from telling their stories to investors at last week’s conference, and outperformed.  SMLP, ENBL and TLP perhaps fall into that category.  AM traded well after receiving a positive IRS private letter ruling related to its water business.  HMLP led all MLPs after its earnings release highlighted expanding backlog of FSRU drop downs.
On the downside, upstream MLPs were hit hard, despite positive oil prices week over week, with most of the selling occurring when NGL prices were reaching lows on Wednesday.  KNOP executed an equity offering that sent it lower this week, after a strong week last week.  LINE and NRP were repeats on the bottom 5 this week.
Year to Date
For the year-to-date, not much changed week over week.  GLP climbed into the top 5 and CCLP’s lead on the sector tightened a bit, but most of the action this week involved the MLPs not pictured, the ones in between the bottom 5 and top 5.
General Partner Holding Companies
It was similarly gloomy among GPs this week, with median returns matching the AMZ’s 2.7% decline.  Only 3 GPs were positive, which makes the top 5 chart below look a bit screwy.   The GPs with higher propane price sensitivity were hit the hardest (TRGP, OKE).
News of the (MLP) World
The 4th MLP IPO of the year launched this week, not counting the 2 GP deals.  These days a $225mm IPO seemed quaint in the face of the $1bn+ IPOs we’ve seen in the last 6 months.  Also, ENLC has completed its quest to shed all physical assets with its announced drop down.  Management of Pioneer (PXD) has said they expect their Eagle Ford midstream assets sales process would have a winner by the end of May, and that didn’t happen this week, so maybe next week.

  • PennTex Midstream (PTXP) launched MLP IPO of 11.25mm units, seeking to raise gross proceeds of $225mm at a 5.5% yield at the midpoint of the filing range (prospectus)
    • NGP-backed midstream company with exclusive area of dedication from NGP portfolio company Memorial Resource Development (MRD) in the Terryville formation in North Louisiana
    • 100% fee-based cash flows, supported by minimum volume commitments from MRD
    • “Top tier” distribution growth will be driven by ramping volumes on existing and under construction plant in the Terryville, and by drop down of Permian assets
    • 08x distribution coverage over the next 12 months expected, but ramping over time such that four quarters from now coverage will be at 1.5x of the minimum quarterly distribution
    • Expected to price Wednesday 6/3
  • Knot Offshore (KNOP) priced offering of 5.0mm common units at $23.76/unit, raising $118.8mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior closing price, and closed at offer price in the next session

M&A / Growth Projects

  • EnLink Midstream (ENLK) announced acquisition of remaining 25% interest in EnLink Midstream Holdings from sponsor EnLink Midstream, LLC (ENLC) for $900mm (press release)
    • Acquisition to be financed 100% with equity issued to ENLC
    • Acquisition represents 9.0x 2015 EBITDA, just like the last deal, but the purchase price came down $25mm
  • KNOT Offshore (KNOP) announced acquisition of the Dan Sabia vessel for $103mm from sponsor Knutsen NYK Offshore Tankers AS (press release)
    • Dan Sabia is chartered with Petrobras Transporte S.A. through 2024
    • KNOP expects this acquisition to lead to a quarterly distribution increase of $0.01-$0.015/unit (2.5% increase at midpoint)


  • Energy Transfer Equity (ETE) announced 2:1 unit split (press release)
  • MarkWest Energy (MWE) priced $1.2bn of 4.875% senior notes due 2025 (press release)
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