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April 13, 2014

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Week Thoughts: MLPs Yield Gains

MLPs trounced the broader market this week, with the MLP Index up 0.6% to close the week at new all-time highs.  Meanwhile, the S&P 500 dropped 2.6%, and is now down 4.0% from its own all-time high.  MLPs actually were right on top of the broader market through Wednesday, then way outperformed Thursday and Friday to pull ahead for the week.
For this week at least, MLPs moved in lockstep with interest rates sensitive securities like Utilities (UTY +0.7% this week) and in the opposite direction of interest rates (10-yr treasury rate down 9 basis to 2.62%, lowest level since early February).  Energy commodity prices were universally up, led by natural gas (+4.1%).
Weekly MLP Review_4-11-14
Large cap MLPs out-performed small cap MLPs this week, with the Equal Weight MLP Index up just 0.1%, which indicates money flowing into MLP products (ETFs, ETNs, open-end funds) that tend to have higher concentration in liquid names.  This marks the third straight week that MLPs were up, the longest streak of weeks since the 5 week streak from mid-January to mid-February of this year.  
Interest Rate Audible
The interest rate situation is surprising the market this year.  The US 10 Yr closed 2013 at 3.03%, and consensus was that rates would continue their upward trend from 2013 as the economy continued to improve.  But the markets have a way of zagging when you expect them to zig, and the 10 year rate is down 40 basis points so far in 2014.  Investors reacted to that this week, calling an audible back to the old standby yield play.  Hiding out in MLPs until the dust settles on the high growth tech and bio-tech stocks that were sold off this week. The highest growing and most richly valued MLPs and midstream corporations are still flying, and now with a tailwind.
Private Letter Rulings
MLPs made mainstream financial news this week when the Wall Street Journal reported on the IRS’s pause in issuing new private letter rulings (PLRs).  I meant to report on this pause here, but somehow just reported it internally.  I first heard about the IRS PLR pause back on March 19th from a presentation Mike O’Leary (Partner at Andrews Kurth) gave in Houston.
The news has slowly trickled out in research analyst reports and finally this week we get a story on it, with a pretty juicy headline (“Energy Spinoffs are Moving into Tax Limbo”), which is slightly misleading.  MLP tax status is not in question or in limbo for existing MLPs and companies forming MLPs with assets that are similar to existing MLP assets that have received PLRs.  Less supply of fringe MLPs probably doesn’t hurt existing MLPs and their stock prices.  But time will tell if the IRS really does halt the expansion of MLP PLRs that has ramped up in recent years.
Winners & Losers
Enable Midstream (ENBL) was technically the winner of the week on the back of its 11.0% IPO pop Friday. But of MLPs that existed at the beginning of the week, PSXP led the sector with a 10.3% increase on enthusiasm following its analyst day.  The same could be said of CQP, with enthusiasm from last week’s analyst day and the announcement of a new LNG sale agreement between CQP’s parent Cheniere Energy, Inc (LNG) and Endesa for the Corpus Christi terminal (press release).  HCLP had some interesting trading around its equity offering, which ended in a 7.5% decline Friday and a 6.2% negative week overall.
Not much of a theme among the rest of the big movers this week.  GSJK continued its torrid pace, up another 5.2% this week after 15.9% last week. 



Year to date, no changes among the top and bottom five constituents, only real move was PSXP leapfrogging TEP.  The Index overall is up 4.3% for the year, well ahead of a negative broader U.S. stock market.



News of the (MLP) World
This week was pretty quiet, outside of the Enable Midstream IPO, and the Hi-Crush flurry of activity.  We did get the beginning of distribution announcement season, with EPD, PAA and GEL all announcing distribution increases in-line with their recent distribution growth rates.  With Targa’s pre-announced better than expected quarter a few weeks ago and with distribution growth tracking expectations, excitement seems to be building towards earnings season that kicks off this week with the Kinder Morgan complex.  Strong earnings and guidance follow-through would likely help justify MLP valuations, and could possibly even break the recent streak of poor performance in May.



  • Enable Midstream (ENBL) prices IPO of 25.0mm common units at $20.00/unit, raising $500mm in gross proceeds (press release)
    • Priced at midpoint (5.75% yield)
    • First day trading: opened at $21.50 (+7.5%), high of $23.22 (+16.1%), closed at $22.20 (+11.0%)
    • Now trades at 5.18% yield
    • Largest change in total equity value for an MLP on its first day of trading ever, with $916.7mm of equity value added to ENBL on day one.  See chart below.

IPO Equity Value Pops

    • The unusually large size and corresponding limited float (6% L.P. interest, $500mm value) of ENBL makes this value creation possible on day one even with a percentage IPO pop (11.0%) that doesn’t even make the top 20 of all time.  The closest comparable in the space to this sort of IPO from a float perspective is WGP, which sold 8% of the entity in its IPO that then created $1.2bn of value in its first day as a public GP holding company.  WGP has a much different growth profile than ENBL, though.
  • Legacy Reserves (LGCY) prices public offering of 2.0mm 8% Series A fixed-to-floating rate cumulative redeemable perpetual preferred units at $25.00/unit, raising $50.0mm in gross proceeds (press release)
  • Hi-Crush Partners (HCLP) prices public offering of 4.25mm common units at $41.29/unit, raising $175.5mm in gross proceeds (press release)
    • One day marketed offering, with file-to-price increase of 2.4%
    • That increase was followed by a steep decline of 7.4% the day after pricing, which is exactly the opposite of what you might expect to happen, and for that I have no explanation…

M&A / Growth Projects

  • Tesoro Logistics (TLLP) announces binding open season by subsidiary Tesoro High Plains Pipeline Company (THPP) and announces another open season on a proposed new THPP gathering system (press release)
  • Hi-Crush Partners (HCLP) announces acquisition of equity interests in Hi-Crush Augusta LLC for $224.3mm in cash consideration (press release)
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