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October 12, 2014

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Week Thoughts: Oil Outbreak Spreads to MLPs

As noted and discussed in my Friday post, the Alerian MLP Index was down 7.0% this week, and the Alerian MLP Equal Weight Index was down 7.7%, which is explained mostly by smaller-weighted upstream MLPs vastly underperforming, and mega-weighted KMP outperforming.
Weekly MLP Review_10-10-14
The interesting thing to note about the Equal Weight Index is that after this week’s decline, it is very close to flat for the year (not counting distributions), and is underperforming the S&P 500 by quite a bit.  So, if you didn’t own KMP and you didn’t participate in any hot IPOs, and maybe had a few upstream MLP positions, your MLP portfolio is probably not having a very good year, which seems incredible given how just 6 weeks ago we were sitting at all-time highs.
Enough about MLPs, the real story of the week is commodity price weakness, and questions about where the demand will come from to soak up surplus oil given questions about global economic growth.  WTI oil futures closed at $85.56/bbl, a 4.7% decline week over week.  Natural gas, ethane and especially propane sold off sharply as well.  Oil’s decline was just a continuation of the steady decline from the end of July when oil was above $105/bbl.
This week was a clear reminder that interest rates are second to fundamental commodity flows and prices in terms of impact on MLPs.  The US 10 year rate was down 15 bps to 2.28%.  Treasuries and U.S. utilities were two of the only places to hide out this week (the UTY index was up 1.1%).
Winners & Losers
Upstream MLPs were the clear losers this week (LGCY, QRE and MCEP all in the bottom 5).  LGCY’s relationship with WPX (announced strategic changes to drilling focus this week) contributed to it having the biggest decline of all MLPs.  Well, technically not all MLPs, because variable distribution MLP EMES was down 21.8%, and general partner holdco MLP ATLS was down 20.7%.  CELP’s business is tied directly to upstream activities, which means it gets sold when energy and commodities get sold as well.  SUSP seems to be the outlier among the bottom five, dropping 18.1% despite having a business that is driven by drop downs and not oil prices, but perhaps financing those drop downs gets more challenging in the current MLP environment.
On the upside, IPO USDP did ok, considering it was marketing against Dominion Midstream this week, and then it priced right into the worst MLP sell off in years.  Non-US focused MLPs SDLP and GMLP did well.  Lightly-traded small cap refined products MLP WPT beat everyone and was one of only 2 MLPs that went up in price this week.
Besides ATLS’s weakness, other GPs were pretty consistent in their under-performance: NSH (-14.3%), SEMG (-14.0%), CEQP (-12.6%), TRGP (-12.4%), ETE (-12.1%), ENLC (-11.1%), WMB (-10.2%), and OKE (-9.2%) were all down between 9-15%.  WGP, KMI and PAGP, which all out-performed the MLP Index.  The under-performing GPs included high-growth, popular GPs like SEMG, ETE, TRGP, and WMB, but also the limited growth GPs like CEQP and NSH.  This is more evidence of widespread selling that (with a few minor exceptions) had little to do with outlooks for individual stocks.
The year-to-date chart looks a bit different this week.  SUSP and RRMS fell out of the top five, replaced by EQM and SRLP.  CMLP joined the bottom 5, while VNR joined the bottom 5 for the first time this year, after falling 24.5% since mid-September.
Closeted Indexer
While not top of mind during this week’s meltdown, at some point in the next few months, we will learn the fate of KMP and KMI in the eyes of the MLP indices that Alerian manages.  For now, Alerian has been understandably quiet on the issue, especially given how much capital tracks their indices.
The Alerian MLP Index is not capped, so keeping KMI in the index would make it a very large position, and around 35% of the index comprised of just 2 names (EPD and KMP), based on our calculations.   There is at least one research analyst that believes Alerian might stage a staggered exit for KMP over more than one quarter if it does come out.  Also, KMI could stay in one MLP index (like AMZI) while exiting the original index.  A couple of questions / issues come to mind.

  • If they changed the rules to allow KMI to be in the index, wouldn’t they need to allow in ETE and companies like Columbia Pipeline Group (the spin off from NiSource) as well?
  • Why is the most-followed index in the industry capped at 50 names? It would be great if Alerian used this as an opportunity to change course and become more inclusive going forward.
  • Keeping KMI in any index is problematic if KMI starts to acquire assets outside of traditional MLP assets. KMI will not be obligated to own MLP qualifying assets.

It will be very interesting to see how it plays out, because there are certainly large dedicated MLP managers that would prefer KMI stay in the index.
News of the (MLP) World

  • USD Partners (USDP) prices IPO at $17.00/unit, below the filing range (press release)
    • IPO yield of 6.76%, highest since GLOP in May of this year
    • USDP opened its first trading day Thursday at $15.80, and closed at $16.00 (-5.9%)
  • Natural Resource Partners (NRP) prices public offering of 8.5mm units at $12.02/unit, raising $102.2mm in gross proceeds (press release)
    • One day marketed offering, with a file-to-price decline of 6.8%
  • Dominion Midstream Partners (DM) launches MLP IPO to raise $350mm at a midpoint yield of 3.5% (filing)
    • Midpoint price already represents a record low MLP IPO yield, very confidently priced
    • Still on track to price Tuesday
  • Breitburn Energy (BBEP) prices public offering of 14.0mm units at $18.64/unit, raising $261mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close
  • Navios Maritime Midstream Partners files initial prospectus for an MLP IPO to raise up to $100 (filing)
  • Markwest Energy (MWE) files S-3 to raise up to $1.5bn worth of common units (filing)

M&A / Growth Projects

  • Targa Resource Partners (NGLS) announces plans to construct Delaware Basin and Williston Basin natural gas processing plants (press release)
    • Delaware Basin plant (in-service by 1Q 2016): 300 MMcf/d processing plant, a header pipeline originating at the new plant and extending into the southern portion of the play
    • Williston Basin (YE 2015 in-service): A 200 MMcf/d processing plant in McKenzie County
    • No indications on the economics or expected construction costs, but based on other plants, the combined cost of these plants should be at least $500mm
  • Global Partners (GLP) announces acquisition of Warren Equities for $383mm (press release)
    • Warren sells ~500mm gallons of fuel annually through 520 retail locations, and operates 147 Xtra Mart convenience stores
    • This transaction is the latest in what has become the most active asset acquisition corner of the MLP space
    • GLP expects the acquisition to produce $50-60mm of EBITDA in its second full year of operations (7x multiple)
  • NGL Energy (NGL) announces successful open season for recently announced Grand Mesa crude oil pipeline from DJ Basin in Colorado to Cushing (press release)
    • Grand Mesa pipeline is being developed jointly by NGL and Rimrock Midstream, LLC
    • Pipeline should be in-service by 2016 and will include 550 miles of new pipeline, 1,500,000 barrels of operational storage, and multiple truck injection points
  • Natural Resource Partners (NRP) announces $340mm acquisition of non-operated working interests in Bakken oil & gas properties (press release)
    • NRP acquiring 5,700 net acres from Kaiser-Francis Oil Company
    • Expected to generate $58-60mm in EBITDA in 2015, implying a 5.8x multiple


  • EPD, PAA, GEL kicked off distribution announcement season with increases that were in line with recent quarterly raises
  • Oiltanking (OILT) announces new CEO from EPD’s deep management bench (press release)
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