MLPs dropped 2.8% (including distributions) this week, the first week since May that included two days with 1%+ declines. Notwithstanding the obvious and likely reasons that MLPs sold off (falling oil prices, rising interest rates, mixed earnings, a large equity offering, etc.), it’s not uncommon for MLPs to selloff around distribution payment season. Several large MLPs passed through their ex-dates this week, which added some technical pressure.
Tuesday’s 1.6% decline was the worst day for MLPs in 6 weeks, as the sector struggled to digest $588mm of equity issued by BPL. The MLP sector’s gag reflex when it comes to large scale equity issuance and to declines in oil prices remains quite sensitive. It also doesn’t help when the sector’s bellweather (EPD) posts weaker than expected results.
You’ve Crossed Over into…the Consolidation Zone
On the bright side, it seems the bid-ask spread for M&A has narrowed enough for a spate of M&A deals to come through this week. Maybe stability of oil prices for 3-4 weeks around $50/bbl and natural gas prices consistently above $3.00/mmbtu have caused the sector to enter the M&A zone.
More consolidation is good. If larger, more integrated midstream operators can pick up under-utilized or stranded assets and make better use of them, it reduces wasted assets and capital throughout the sector. Efficient capital allocation is critical today when capital and opportunities are more scarce than in years past.
…and the IDR Takeout Zone
There is also growing evidence that we may have entered the IDR takeout zone. An MLP buying out or resetting its IDRs is usually near-term dilutive, but the market seems eager to cheer such news if it means IDRs are eliminated forever. PAA’s IDR collapse is a good example, so is GMLP’s IDR reset last month.
This week MPC acknowledged their IDRs might be a problem for MPLX and seemed open to transactions that might eliminate the IDRs, which were previously seemed to be considered sacred.
In order to compete in the future (absent a sponsor-driven M&A or production growth strategy), IDRs need to be dealt with. And while the sector still hasn’t dealt with them at IPO, as all new MLPs voluntarily choose to burden themselves with IDRs.
EPD, MMP, PAA, BPL, KMI, TRGP, GEL, CEQP and others have eliminated their IDRs in one way or another. We are now at the point where the majority of the market cap of the midstream sector has no IDRs, which means at this point they are more the exception than the rule. Its just ironic that MPLX is the one has realized this-started this IDR conversation a year after buying MWE, which had no IDRs.
Back at the end of April, I ran through the consolidation and rationalization that had occurred since the end of 2014 when the oil collapse began. I determined the investable universe of MLPs (excluding general partner holdco’s and variable pay MLPs) with market capitalization of more than $250mm was 79.
Since April, several additional MLP consolidations and rationalizations have occurred, such that an update is warranted. I’m not sure what the ideal number of MLPs is, but whatever the number, we are getting closer to it each week.
After 6 months of commodity price and capital market improvements and a number of M&A puts and takes, the number stands today at 78 MLPs with a combined market capitalization of $333bn.
Additions include: 1 new MLP IPO (NBLX) and several MLPs added back into the mix after hurdling the $250mm market capitalization level (e.g. USDP, SDLP, NRP). The removals from the universe include 1 bought by its sponsor (RRMS), 3 pending mergers or acquisitions (CPPL, JPEP, RIGP).
Winners & Losers
MPLX caught the market off guard again this quarter. Recall back in February, MPLX shocked the market when management lowered distribution growth guidance, and the stock did a painful round trip below $20 and back. This quarter, management surprised the other way, with accelerating growth outlook and a more LP-friendly philosophical discourse on the IDRs.
TLLP rallied in sympathy as they face similar IDR challenges and have messaged a similar LP-friendly philosophy in recent months. JPEP led all MLPs on the merger announcement on Monday. BWP seems to have gained some traction in the recent flight to “pipe in the ground”, which BWP has in spades.
On the downside, WLKP made it two straight weeks in the bottom 5 and FGP continues to struggle. RMP reversed its top 5 performance last week, presumably on weak natural gas prices and profit taking.
On the YTD leaderboard, not much changed, although NRP fell from second to third overall, while FGP took over the bottom spot. Each week, SHLX drifts a bit closer to the bottom spot, and is certainly the worst performing pipeline MLP year-to-date.
G.P. Holding Companies and Midstream Corporations
GPs underperformed MLPs this week. AROC and ETE were battling it out for the bottom spot. Investors remain very skittish around the Energy Transfer complex around the DAPL uncertainty. MPLX commentary on the call gave little color on the pending project buy-in by MPLX and EEP, but management indicated the investment had not closed, which sent ETE/ETP lower on Thursday.
AHGP outperformed on better than expected results from ARLP announced Friday. WMB’s official delay announcement didn’t seem to phase WMB too much relative to other GPs.
News of the (MLP) World
Merger Monday kicked things off with the combination of two ArcLight-backed MLPs, followed by two more major deals at the GP level that seem to be signaling a renewed willingness to participate in strategic M&A for both buyers and sellers within the sector. BPL’s financing transactions dominated the financing action this week, which tends to be fairly like usually during earnings season. Also, another 31 MLPs announced distributions.
Growth Projects / M&A