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May 15, 2016

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Week Thoughts: Now What?

MLPs grinded higher by 0.4% this week, overcoming the first 3-week losing streak for the S&P 500 since January, helped by oil prices that broke above $46/bbl on positive demand and inventory data points.
Weekly Review_5-13-16
The MLP Index touched 300 intraday a few weeks ago, but still hasn’t closed above 300 since 11/30/15.  This week, the index again inched towards 300, reaching as high as 295 Thursday before falling back Friday.
It feels like there’s a consistent bid for MLPs, MLPs wavered at various points throughout the week, but the bottom didn’t fall out.  MLPs continue to hold above the 200 day moving average, but not surprising to see MLPs “consolidating” after the incredible rally off the bottom.
One Word: Plastics
First quarter earnings season is over, 2016 leverage and funding needs to varying degrees have been solved, the high yield and equity capital markets are improving, and MLPs have stabilized.  All of this is on the back of forceful oil price rally in the face of record inventory levels.
The market has stepped back from the abyss, and appears comfortable that MLPs (midstream ones at least) aren’t going out of business.  Multiples have expanded to a level that is pricing in stability and eventual growth for industry cash flows beyond 2016/2017.
The extreme fear and uncertainty to which we had grown accustomed has subsided.  As the adrenaline fades and valuations have recovered, the sector today reminds me of the last image from the movie the Graduate.  The iconic moment after Dustin Hoffman’s character Benjamin convinces Elaine Robinson to run away from her wedding with him.  They have hopped onto a passing bus and are seated in the back. The excitement fades and they stare off into space.  The implication is that after this extreme moment of passion and excitement: now what?
Graduate
Expectations remain fairly low for 2016, but for MLPs to mount a further rally from here, further multiple expansion is necessary, and therefore further confidence in cash flow growth in 2017/2018 is necessary (absent a wave of cash-based M&A from external sources…).
Poll Question
In light of recent MLP performance, I thought we’d revisit the previously presumptive GP rollup transactions.
Sorry, there are no polls available at the moment.
Winners & Losers
RRMS’s ascent continued this week, making a rollup by its general partner less attractive and less necessary with each tick.  GEL and WPZ were the leaders among MLP Index constituents.  On the downside, DPM gave up some of last week’s sector-leading gains, while SDLP’s contract termination news confirmed weak fundamentals for offshore rigs and dragged down RIGP as well.
Top5Bottom5_5-13-16
Top5Bottom5_5-13-16_chart
Outside of CPLP, the bottom 5 are all down less than 20%, while the top 5 are all up more than 50%.
Top5Bottom5_5-13-16_YTD
SDLP dropped out of the top 5, while DKL joined the bottom 5.
Top5Bottom5_5-13-16_YTD_chart
General Partner Holding Companies
Overall, GPs underperformed MLP slightly.  TEGP and OKE made it back into the top 5.  Oil beta stocks PAGP and SEMG were among the winners after lagging last week.  Questions remain on whether some of these remaining holding companies consolidate with their MLPs in an effort to reduce overall distributions or otherwise improve their financial situation.  If RRMS and WPZ continue to rally sharply, however, what had become a vicious cycle turns virtuous again and collapsing the structure makes increasingly less sense.  That’s sort of a catch 22 for some of these stories where the MLP may be rallying partly because a rollup is expected.
Top5Bottom5GPs_5-13-16
Top5Bottom5GPs_5-13-16_chart
News of the (MLP) World
Debt capital markets provided most of the action for transactions this week.  A total of $2.5bn of new bonds priced this week for MLPs, including some pretty attractive yields for non-investment grade paper for TLLP.  LINE’s bankruptcy brought out the MLP boo-birds, who were happy to have something to crow about given recent strength for MLPs.  Also, Tepper added to his MLP positions.
News-of-the-World
Financing

  • Rice Midstream (RMP) filed equity distribution agreement to sell up to $100mm worth of common units at-the-market (filing)
  • Holly Energy (HEP) announced equity distribution agreement to sell up to $200mm worth of common units at-the-market (press release)
  • Tesoro Logistics (TLLP) priced $700mm of senior notes (press release), including:
    • $250mm of 6.125% senior notes due 2021 at 100.25%
    • $450mm (upsized from $350mm) of 6.375% senior notes due 2024 at par
  • Boardwalk Pipeline (BWP) priced $550mm of 5.95% senior notes due 2026 (press release)
  • Cheniere Energy (LNG) announced that its subsidiary Cheniere Corpus Christi Holdings, LLC priced $1.25bn worth of 7.0% senior notes due 2024 at par (press release)
    • Offering upsized from $1.0bn to $1.25bn
    • Issuer is a subsidiary of Cheniere Energy, Inc. as part of the Corpus Christi LNG development, and is not owned by the MLP at this point

M&A / Growth

  • Tallgrass Energy (TEP) announced closing of 25% interest in Rockies Express (REX) from Sempra for $440mm (press release)
    • This is now the third time this deal has made this section as minor tweaks continue to develop…and we’ll discuss further details of it next week as TEP is planning a conference call for next week to discuss REX’s long-term cash flow prospects
  • Enbridge (ENB) announced the acquisition of 50% interest in Eolien Maritime France SAS (EMF), a French offshore wind development company (press release)
    • ENB will invest CAD$282mm inclusive of transaction costs and past and future pre-FID development costs for 3 offshore wind projects that EMF is developing
    • Each of the 3 projects has a signed 20-year power purchase agreement with Electricite de France (EDF), pursuant to which EDF will pay a fixed price for 100% of the power generated by each facility
    • The combined total development cost for ENB’s 50% stake in the 3 projects is $4.5bn

Other

  • Linn Energy (LINE) voluntarily filed for Chapter 11 bankruptcy to implement debt restructuring (press release)
    • This once proud poster child for the roll up of mature producing properties with external financing becomes the poster child for a second failed experiment of wrapping production in a fixed dividend model with high leverage
    • Most of us at one time or another owned upstream MLPs and on some level believed the model could work, and did through the global financial meltdown, but not the extended oil decline
    • There is not much to say beyond that, there are plenty of other places on the Internet to see electronic personas figuratively dance on LINE’s grave (or to lament painful tax consequences of owning it through the debt restructuring)
  • Cheniere Energy (LNG) announced appointment of Jack Fusco as new CEO after extensive search process (press release)
    • Action Jack is former CEO (2008-2014) and Executive Chairman (2014-2016) of Calpine Corporation
    • Cheniere has granted Fusco 236,381 restricted shares, and Fusco has agreed to purchase $10mm worth of Cheniere common shares by 12/31/16
  • Appaloosa Management (David Tepper’s hedge fund) filed updated holdings as of 3/31 that indicate substantial increase in MLP holdings (filing)
    • Added 10.8mm units of WPZ, now owns 13.2mm units ($400mm value today)
    • Added 11.0mm units of ETP, now owns 16.1mm units ($554mm value today)
    • Reduced KMI by 4.9mm shares, now owns 4.5mm shares ($77mm value today)
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