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November 9, 2014

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Week Thoughts: MLPs Working Big to Small

MLPs kept pace with the slight gains of the broad stock market this week, even as oil prices touched multi-year lows mid-week.  MLPs caught up with the market with big gains Friday, when the MLP Index was up 2.0%.  Year to date total return for the MLP Index ended the week at a nice round 15%.  Elections in the U.S. gave Republicans control of the House and Senate, which seems to have been interpreted as a positive sign for development of energy resources and energy infrastructure.
Weekly MLP Review_11-7
Natural gas prices climbed for the second straight week, and are now well above $4.00. As producers develop drilling plans for next year drilling plans, don’t expect a reversal of the oil rig count growth back to natural gas.  But natural gas price strength is welcome for MLPs, even if it narrows the global LNG arbitrage.
Index Inferences
Large cap MLPs continue to drive the MLP Index higher, as the spread between the price return of the cap-weighted MLP Index and the Equal Weight version is now 600 basis points.  For historical context, for the last 11 years, the most the MLP Index has ever outperformed its Equal Weight version by is 785 basis points in 2008.  See below for an annual breakdown.
Equal Weight vs. AMZ
Overall, the Equal Weight version on average outperformed the cap-weighted version by more than 300 basis points.  Interestingly, the MLP Index has outperformed its Equal Weight counterpart just 5 times out of 11, and each time it was in a year when both indexes had produced less than 15% returns.  With the Alerian Index up exactly 15% this year, to keep consistent with history, smaller MLPs need to catch up by year end, or MLPs will be flat into year end.
To be clear, the constituents of each index are exactly the same, all that is different are the size of the individual MLP weights.  In the Equal Weight version, every MLP is a 2% weight.  In the cap weighted version, the largest MLP EPD is a 15.9% weight.
Winners & Losers
Antero Midstream’s debut this week was less stellar than recent IPOs, but still good enough to outpace all other MLPs this week.  Pricing the IPO 25% higher than the midpoint of the filing range took some of the juice out of the potential pop.  DM made it 3 straight weeks in the top 5, up another 10.7%, perhaps helped by AM’s IPO highlighting relative value for DM.  RNO made it to the bottom 5 again this week, down another 7.5%.  Three upstream MLPs made the bottom 5 (MEMP, EROC, LRE), with MEMP’s performance taking the bottom spot for the entire sector after MEMP posted results way below expectations on production and operating expenses.  MEMP also guided to $55m less EBITDA in 2014 compared with previous guidance.
Year to date, DM has in just three weeks managed to produce the 4th best return of all MLPs at 57.3%.  MPLX continued its ascent this week, moving ahead of EQM into 3rd place.
News of the (MLP) World
MLP earnings season is almost over, and earnings releases this week were accompanied by some very large growth project announcements and updates, along with a few sizeable acquisitions.  MLP IPO season is in full swing, with another IPO priced last week, two IPOs on the road and two more IPOs filed.  After this week, there will have been 18 MLP IPOs in 2014 with no signs of slowing down.

  • Antero Midstream (AM) priced IPO of 37.5mm units at $25.00/unit, raising $1.0bn in gross proceeds (press release)
    • AM opened at $30.50, and closed at $28.03, up 12.1% in its first session
    • Offering upsized from initial 37.5mm units during the marketing period
    • IPO yield of 2.7% ranks as the lowest ever for an MLP

Lowest Yields

  • AM’s IPO size of $1.0bn ranks as the largest IPO ever for an MLP

Largest MLP IPOs

  • Plains GP Holdings (PAGP) launched secondary offering of 55.0mm units with proceeds going to selling unitholder (press release)
    • Selling unitholder is a subsidiary of Occidental (NYSE: OXY)
    • Offering is being marketed over three days and is expected to price on Monday afternoon
    • Based on its current price, the offering could raise $1.4bn in gross proceeds to OXY
  • Navios Maritime Midstream Partners (NAP) launched IPO of 8.1mm units with midpoint IPO yield of 8.25%, expected to raise $162mm at the midpoint (filing)
    • NAP is a spinoff from Navios Maritime Acquisition (NYSE: NNA) that will own and operate crude oil tankers under long-term charter agreements
    • NAP’s initial assets consist of 4 oil tankers with an average remaining contract term of 7.7 years, and NAP will have the option to buy 7 additional tankers from its parent
    • NAP is selling a 42.5% stake in the IPO
    • NAP will have net debt of $106mm post-IPO, and expects to generate $34.6mm in distributable cash flow over the next 12 months
  • Rice Midstream Partners (RMP) filed initial registration statement to raise up to $425mm in an MLP IPO (filing)
    • RMP is a spinoff of midstream assets developed by Rice Energy (NYSE: RICE), a publicly-traded producer that went public in early 2014
    • RMP has acreage dedications with RICE under a 15-year, fixed-fee contract for gathering & compression covering 55,000 acres of RICE’s acreage in Washington and Green Counties in the Marcellus Shale in southwestern Pennsylvania
    • RMP will retain a ROFO on RICE’s Ohio (Utica shale) gathering system and RICE’s freshwater distribution systems serving its Marcellus and Utica acreage
    • RMP will have no debt after the IPO, very similar to other Marcellus MLP spinoffs Antero Midstream and CONE Midstream
    • RMP is expected to have $55.7mm in EBITDA the next 12 months
    • CEO and CFO have a combined age of 62 years old
  • Terryville Mineral & Royalty Partners (TRVL) filed initial registration statement to raise up to $150mm in an MLP IPO (filing)
    • Formed by Memorial Resource Development (NYSE: MRD) to own and acquire royalty interests and mineral interests from MRD and third parties
    • TRVL will have a minimum quarterly distribution and IDRs up to 25%, which distinguishes it from another royalty interest MLP VNOM, which pays a variable distribution
  • Landmark Infrastructure Partners (LMRK) launched IPO of 3.0mm units to raise $60mm at midpoint of price of $20.00/unit, 5.75% yield (filing)
    • LMRK owns a portfolio of real property interests leased to companies engaged in wireless communications, outdoor advertising and renewable power generation
    • Portfolio includes 701 sites across 42 states, 99% of which are leased, 88% of which are leased to large, publicly-traded companies with national footprints
  • Sunoco Logistics (SXL) files equity distribution agreement to sell up to $1.0bn worth of common units at the market (filing)
  • EnLink Midstream (ENLK) files equity distribution agreement to sell up to $350mm worth of common units at the market (filing)

M&A / Growth Projects

  • Plains All American (PAA) announced the $1.075bn acquisition of 50% interest in BridgeTex crude oil pipeline from Occidental Petroleum (press release)
    • PAA will acquire 50% interest in the 300,000 bbl/d pipeline which recently began service and transports oil from the Permian basin to the Texas Gulf Coast
    • PAA paying around 10x EBITDA, and PAA expects 1.5% accretion from the acquisition
  • Sunoco Logistics (SXL) announced $2.5bn Mariner East 2 Pipeline (press release)
    • The pipeline will transport 275,000 bbl/d of NGLs produced in the Marcellus and Utica shale to SXL’s Marcus Hook terminal in eastern Pennsylvania for export and local demand
  • Kinder Morgan Energy (KMP) announced the proposed Palmetto Project received sufficient committed volumes to proceed with the project (press release)
    • The 167,000 bbl/d pipeline will transport refined products across the southeastern U.S.
    • Anticipated to cost $1bn, supported by 5-10 year contracts
  • Enterprise Product (EPD) and Plains All-American (PAA) announce expansion of the Eagle Ford Joint Venture Pipeline system and plans to build a new terminal (press release)
    • EPD and PAA will construct a new condensate gathering system and expand storage capacity at the JV’s Three Rivers terminal
    • JV will also build a new terminal on the Corpus Christi ship channel which will connect to the Three Rivers terminal by a newly constructed pipeline
  • Seadrill Partners (SDLP) announced the acquisition of the West Vela drillship from sponsor Seadrill Limited (press release)
    • SDLP will acquire 51% interest in the West Vela at a cost of $433mm including the assumption of debt
  • Energy Transfer (ETP) announced plans to construct two new natural gas processing plants and associated gathering systems in the Eagle Ford shale and East Texas (press release)
    • ETP will build two 200mmcf/d processing plants
    • ETP will also construct the 200mmcf/d Volunteer Pipeline which will connect the East Texas plant to an ETP gas gathering system
  • Markwest Energy (MWE) announced plans to expand natural gas processing and fractionation capacity in the Utica shale (press release)
    • MWE, as part of the Markwest Utica EMG joint venture will construct an additional 200MMcf/d processing plant which will increase the JV’s total processing capacity to 1.5bcf/d
    • The JV also announced plans to construct a new 60,000 bbl/d fractionator in the Utica shale bringing total fractionation capacity to 274,000 bbl/d in the Marcellus and Utica shales
  • Plains All-American (PAA) announced plans to construct a new crude oil pipeline from Oklahoma to East Texas (press release)
    • Total capacity of the pipeline will be 150,000 bbl/d and is supported by long-term commitments
  • Sprague Resources (SRLP) announced acquisition of Castle Oil for $56mm (press release)
    • Castle Oil assets include the Port Morris terminal and its associated wholesale, commercial and retail fuel distribution business
    • The Port Morris terminal is the largest deepwater petroleum products terminal in New York City, with total storage capacity of 907,000 barrels
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