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October 30, 2016

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Week Thoughts: Oil and Equity Don’t Mix

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.
Universe Pruning
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.
YTD Leaderboard
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.

  • Buckeye (BPL) priced public offering of 7.75mm units (8.9mm with the over-allotment option) at $66.05/unit, raising $588.7mm in gross proceeds (press release)
    • Offering upsized from 7.5mm originally offered, BPL also announced exercise of the over-allotment option (additional 1.1625mm units)
    • Bought deal, priced at 6.5% discount to prior closing price, but outperformed in the next trading session, up 2.3% from pricing when MLPs were down 1.6% as a group
  • Buckeye (BPL) priced offering of 3.95% senior notes due 2026 at 99.644% (press release)
    • Proceeds to be used to partially fund acquisition
  • Emerge Energy Services (EMES) filed S-1 registration statement to register 2.75mm common units (filing)
    • Smart Sand, Inc. is on the road with its IPO this week, so perhaps EMES is expecting to capitalize on renewed interest in frac sand in the market to sell additional equity

Growth Projects / M&A

  • American Midstream (AMID) announced merger with JP Energy Partners (JPEP) in an all-stock transaction (press release)
    • AMID will acquire 100% of the units of JPEP in a unit-for-unit exchange whereby AMID will issue 0.5775 units for every JPEP unit (14.5% premium to prior closing price)
    • For the units owned by ArcLight, the exchange ratio will be lower at 0.5225
    • ArcLight committed to providing $25mm to ensure 5% accretion in 2017 and 2018 for AMID
  • Energy Transfer (ETP) announced acquisition of G.P. and L.P. interests in PennTex Midstream Partners (PTXP) for $640mm (press release)
    • ETP will own 100% of the G.P. and IDRs, plus 6.3mm common units and 20mm subordinated units
    • Purchase funded 50% by ETP common units issued to sellers and 50% cash
    • ETP highlighted synergies with existing assets in the region and strategic nature of the transaction
    • ETE supported ETP’s cost of capital in the purchase with a permanent IDR waiver of $33mm
    • ETP reports earnings on 11/10, two days after the election, expect more details on expectations around the acquisition on that day’s conference call
  • Buckeye (BPL) announced $1.15bn acquisition of 50% interest in VTTI BV from Vitol (press release)
    • Vitol will retain 50% ownership of VTTI BV
    • VTTI BV owns and operates ~54mm of petroleum products storage across 13 terminals located on 5 continents (but not North America)
    • VTTI BV also owns 100% of the IDRs, 2% G.P. interest and 45.9% L.P. interest in of MLP VTTI Energy (VTTI)
    • Acquisition to close in January 2017, and to be funded by the capital markets transactions above
    • BPL indicated it expects the EBITDA multiple over the next 4 or 5 years to be 10x
  • Williams Partners (WPZ) announced updated target in-service date for Atlantic Sunrise Pipeline project (press release)
    • WPZ expects partial service to begin during the second half of 2017, full service by mid-2018
    • This update is not a surprise given the FERC announcements in recent weeks around this project


  • Jeff Wood returns to the MLP sector as CFO of Blackstone Minerals (BSM), where he replaces outgoing CFO Marc Carroll (press release)
    • Wood was latest employed as CFO of Siluria Technologies, prior to that he was CFO of Eagle Rock Energy, and a lifetime ago, I was his direct report at Lehman Brothers
  • Distribution announcements this week (31 in total, 73 for the quarter so far)
    • Does not include STON, which I stopped including in this blog about energy MLPs a while ago, and which cut its distribution Thursday and fell 44.6% Friday
    • MEMP also suspended distributions late Friday


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