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May 3, 2015

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Week Thoughts: Money May-Weather for MLPs?

MLPs marched higher again this week, running their winning streak to 7 weeks.  Coincidentally, oil prices were up for a 7th straight week as well.  This week, however, natural gas prices had a significant bounce as well.  The rate on the US 10-year rose by 20 basis points week over week, pushing down other yield-based equities.  Given the overriding influence of rising oil prices, If oil prices continue to recover, MLPs may be an attractive safe haven relative to utilities and REITs in a rising rate environment.
Weekly Review_5-1-15
Oil prices are up more than 35% since bottoming in March, and the Alerian MLP Index is up 9.8% over the same time period.   MLPs are now positive for the year, when including distributions, closing fast on the S&P 500, which was down this week.
Status Update
We passed through another month this week, and it was a pretty great one for MLPs, with the AMZ up 6.2%, more than making up for a dismal March.
Status Update_4-30
Looking ahead, May has been negative 10 of the last 19 years, the highest percentage of any month.  May was down more than 2.0% for 4 straight years from 2010-2013, but that streak ended with a positive May last year.  May has produced average returns of -0.2% over the last 19 years, one of only 2 negative average months, but seasonality is out the window if oil can sustain itself over $60 in May.
Monthly MLP Returns_4-30-15
The next step on the path towards sustained MLP recovery will be when the index strings together consecutive positive months, which hasn’t happened since May and June of last year. Beyond May, MLPs have historically performed quite well after May, with positive average returns in June, July and August.
Winners & Losers
SDLP’s flat distribution announcement this week apparently caught the market by surprise, because it was up 20%, which is more than just oil price beta.  On no news whatsoever, the market began paying attention to CNNX again this week, in advance of perhaps a more upbeat earnings release in a few weeks.  Biomass (wood pellets) MLP EVA performed well after pricing its IPO at a 8.25% yield.
On the downside, MEP led the way lower after reporting disappointing 1Q results, reduced guidance and the delay of drop-down plans.  It seemed as though some investors were betting HEP would get called up to the Alerian MLP Index, because it sold off immediately following the announcement that RRMS would be replacing RGP in the index.  SRLP declined 5.3% despite raising distributions 3.3% quarter over quarter.
Year to Date
MMLP reported solid earnings that pushed it back near the top of the MLP sector so far this year.  Aside from MMLP, small cap commodity sensitive names dominate the top 5.  On the downside, just re-shuffling the deck of underperformers this week, with NSLP gaining ground at CAPL’s expense.
Top5Bottom5_5-1-15_YTD Top5Bottom5_5-1-15_YTD_chart
News of the (MLP) World
It’s game on again for MLP IPOs.  Three very different IPOs were on the road this week, seeking to raise a combined $1.5bn in gross proceeds.  Expect more IPOs to come, and with continued lackluster fund flows into the MLP space, expect some capital rotation among MLPs to help fund these IPOs.  Recent strength in MLPs hopefully will lead to increased fund flows to help soak up IPOs and what should continue to be heavy follow-on activity following earnings season.
In M&A / project news, EPD is showing its ability to leverage its unparalleled footprint to source projects, while drop-downs continue to dominate M&A activity so far this year.  Also, the final pending merger between two Alerian constituents is now complete, and another large MLP was replaced in the index by a small-cap MLP, increasing the weight of the top 10 largest MLPs in the index to 66%.

  • Tallgrass Energy GP, LP (TEGP) launched IPO of 35.3mm units expected to raise $900mm in gross proceeds at the midpoint price of $25.50/unit, which represents a 2.45% next 12 months yield (prospectus)
    • Expected to price on 5/6
    • TEGP owns G.P. interest, IDRs and 20mm units of Tallgrass Energy (TEP)
  • Enviva Partners (EVA) priced IPO of 20.0mm units at $20.00/unit (8.25% yield), raising $200mm in gross proceeds (press release)
    • EVA opened its first trading session at $20.00, traded as high as $22.40 before closing at $21.50, up 7.5% from pricing
  • Black Stone Minerals (BSM) priced IPO of 22.5mm units at $19.00/unit (5.52% yield), raising $427.5mm in gross proceeds (press release)
    • BSM opened its first trading session at $19.15, then traded lower and closed at $18.24, down 4.0% from pricing

M&A / Growth Projects

  • Enterprise Products (EPD) announced 50/50 JV with Occidental to develop 150 mmcf/d processing plant in the Delaware Basin (press release)
    • EPD did not disclose expected costs of the plant, which is expected to be in-service by mid-2016
    • Including this plant, EPD will have more than 600 mmcf/d of processing capacity in the Permian Basin
    • EPD will also construct a small pipeline from the plant to connect the plant to EPD’s existing pipelines and give the plant access to EPD’s fractionation complex at Mont Belvieu
  • Enterprise Products (EPD) announced plans to construct a new pipeline to transport oil and condensate from Midland to just outside Houston (press release)
    • The pipeline will interconnect with EPD’s Rancho II pipeline to access the ECHO terminal
    • Although expected costs were not disclosed, the pipeline expected to be in-service by 2Q 2017
    • Pipeline will be 416 miles long with capacity of 540,000 barrels/day
  • Westlake Chemical Partners (WLKP) announced $135mm drop down of 2.7% additional Opco interest (press release)
    • This is WLKP’s first drop down acquisition since its August 2014 IPO and increases WLKP’s interest in the Opco to 13.3%
  • MPLX announced that the board of its sponsor (Marathon Petroleum) has authorized sale of marine assets to MPLX (press release)
    • The marine assets have $115mm of annual EBITDA, implying a purchase price of more than $1bn
  • Private company Caliber Midstream is reportedly seeking a sale (Reuters)
    • Caliber is owned by a First Reserve infrastructure fund and Triangle Petroleum
    • Caliber owns a network of pipeline assets within the Bakken and Three Forks producing areas of the Bakken Shale


  • Alerian announced the following index changes
    • Rose Rock Midstream (RRMS) will be joining the Alerian MLP Index, replacing RGP (press release)
      • ETP becomes the first MLP other than EPD and KMP to have more than 10% weight since EEP in 1999
    • CSI Compressco (CCLP) will be joining the Alerian Natural Gas MLP Index, replacing RGP (press release)
    • Re-balancing of the Alerian MLP Infrastructure Index, with no constituent changes (press release)
  • Distribution Announcements:
    • ETE +8.9%
    • SXL +4.7%
    • APU +4.5%
    • WNRL +4.5%
    • SRLP +3.3%
    • AHGP +2.5%
    • WLKP +2.9%
    • GMLP +2.7%
    • ETP +2.0%
    • ARLP +1.9%
    • ENBL +1.2%
    • BPL +1.1%
    • EXLP +0.9%
    • Flat: SDLP, MEMP, CPPL, NMM
    • No cuts!
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