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August 6, 2017

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Week Thoughts: Quorum for FERC, MLP Investor Quorum Elusive

MLPs declined 1.4% including distributions this week, despite flat oil prices near $50/bbl, a flat broader market and still low interest rates.  The price index dropped to its lowest level since late June, reversing the slight bounce in July.  The equal weight version of the MLP Index underperformed by 50 basis points this week, indicative of small cap weakness.

“Unasked for Dicta”
This distribution/earnings season it feels like more investors than usual were waiting on one more distribution before selling MLPs, unless there was a sector catalyst to give them a reason to hang on.  That catalyst did not show up.  Earnings have been mixed to weaker than expected, equity needs have not been reduced enough (ETP Rover sell-down notwithstanding), and producer earnings and higher gas-oil ratio discussions have spooked interest in energy broadly.
Early in the week, ETP’s announcement of $1.57bn capital infusion and private equity value recognition failed to spark broader interest in the sector.  Rather it led to rotation from other large cap diversified MLPs like WPZ and OKE into ETP.  Fund flows are being re-circulated rather than expanding overall.
Also, FERC commissioners were confirmed by the senate on Thursday, solidifying a quorum for the first time since February.  This is a clear positive for MLPs that are developing natural gas pipelines, particularly those seeking to add takeaway capacity for Northeast natural gas, but are waiting on approvals.  That news also did not drive broad-based interest in midstream stocks, at least not the first day post quorum.
With the sector on firmer footing than it has been in recent years, the capital recycling is not a “re-arranging the deck chairs on the Titanic” situation, but the overall dearth of fund flows will likely drive consolidation longer term as MLPs able to access capital markets grind away those with high cost of capital.  In the absence of consolidation, MLPs will need to be creative or at least more disciplined with regards to retaining cash flow to fund growth aspirations.  They also probably can’t support IDRs.
The quote in the header above was an off-the-cuff phrase coined by TEP CEO Dave Dehaemers on his earnings call this week.  It could also describe this blog’s weekly content and (more derogatorily) what I am currently hearing while on my annual trip to visit relatives in Texas.
Poll Question: FERC Winner
Sorry, there are no polls available at the moment.
Status Update
Monday was the end to another month, and MLPs were positive for the first time since this February, ending the longest streak of negative months (4) since last February.  MLPs have already erased July gains in the first 4 days of August.

August has been the most consistently negative month for the last 8 years, with 6 negative months, including 2 straight years.  Sentiment can turn positive on a dime, but so far August seems to be par for the course.
Winners & Losers
Positive results from CEQP, PBFX and ENBL landed them at the top of the sector this week.  Weak results from NGL and further reduced guidance sent NGL into a 19% tailspin.  Compression MLPs dominated the bottom 5, but the one that issued equity this week (APLP) was oddly the best performer of the three.


Year to Date Leaderboard
On the year to date leaderboard, no constituent changes across the board, just some jockeying for positioning.  All 5 of the bottom 5 are now down more than 30% each for the year so far, sad!


General Partners & Midstream Corporations
GPs and midstream corporations underperformed the MLP Index this week.  Just one of the group, AHGP, was positive after last Friday’s IDR elimination transaction announcement and distribution increase.  ETE was a surprise negative performer despite the announcement of a large capital infusion by Blackstone into ETP.  3 of the bottom five reported results this week (TEGP, OKE, and AROC), while the other two (PAGP and SEMG) are oil infrastructure focused and generally higher beta.

PAGP, OKE and SEMG were up big last week, and reversed course this week.

News of the (MLP) World
Very active news week, but no NGL pipeline JV as discussed in the poll question last week.  More than 66% of you believe TRGP and EPD will combine their pipeline projects, but it definitely did not happen this week.  Equity markets were active for the first time in a while as APLP braved the equity markets with a small offering at a wide discount.  Others filed to issue equity later or over time.
Capital Markets

  • Archrock Partners (APLP) priced public offering of 4mm units at $13.75/unit, raising $55mm (press release)
    • Overnight offering, priced at 10.3% discount, and traded down 3.9% in the following session
  • EnLink Midstream (ENLK) entered into $600mm equity distribution agreement (filing)
  • Crestwood Equity (CEQP) entered into $250mm equity distribution agreement (filing)
  • Genesis Energy (GEL) filed $1bn mixed shelf (filing)

Growth Projects / M&A

  • Energy Transfer (ETP) announced the sale of 32.44% stake in entity of Rover Pipeline Project to Blackstone Energy Partners for approximately $1.57bn (press release)
    • Blackstone will receive a 49.9% interest in ET Rover Pipeline LLC, which owns a 65% interest in the Rover Pipeline
    • Upon completion, the 700-mile Rover Pipeline will be able to transport 3.25 Bcf/d from the Marcellus and Utica Shale production areas to markets north
    • The Blackstone investment will reimburse ETP for its pro rata share of construction costs incurred by ETP through the closing date
  • Genesis Energy (GEL) announced $1.33bn acquisition of an alkali business from Tronox Limited (press release)
    • The Alkali Business produces approximately 4mm tons of natural soda ash per year, or about 28% of all natural soda ash produced in the world
    • In conjunction with the transaction, KKR Global Infrastructure Investors and GSO Capital will acquire approximately $750mm of 8.75% Class A convertible preferred units; 22.2mm common units at a price of $33.71/unit
    • Can’t fault the effort: GEL has tried de-leveraging organically with EBITDA growth, and with defense (equity issuance), and is now offensively de-leveraging via M&A
  • ONEOK (OKE) announced expansion of Canadian Valley natural gas processing facility to accommodate STACK production growth (press release)
    • The expansion to 400 MMcf/d from 200 MMcf/d is expected to cost $155-165mm and is supported by 200,000+ acres of dedication, and primarily fee-based contracts
  • EnLink (ENLK) announced new Black Coyote crude oil gathering system (press release)
    • The system will support sponsor Devon’s ongoing development of their acreage in the STACK, including Devon’s multi-zone Showboat project
  • Crestwood (CEQP) announced Shell Midstream (SHLX) exercised buy-in option in Delaware Basin Nautilus gas gathering system (press release)
    • SHLX will purchase a 50% equity interest in the system currently owned by a joint venture of First Reserve and CEQP
    • The system gathers the majority of Shell’s operated Delaware Basin gas under a 20-year tiered, fixed-fee contract
  • Macquarie Infrastructure (MIC) announced its subsidiary IMTT to acquire Epic Midstream liquids terminalling business for $171.5mm (press release)
    • Purchase price reflected 11.0x EBITDA, funded with $125mm in new MIC shares and $46.5mm in cash
    • Epic Midstream operates 7 bulk liquids terminals in the U.S. Southeast and Southwest, comprising 3.1mm barrels of storage, with a significant portion of which is in service for jet fuel

Other

  • Tesoro Corp (TSO) and Tesoro Logistics LP (TLLP) changed their names to Andeavor (ANDV) and Andeavor Logistics LP (ANDX) (press release)
  • EQT Corporation (EQT) and EQT Midstream (EQM) appointed Jeremiah Ashcroft as Midstream President and COO (press release)
    • Ashcroft’s most recent position was CEO of Gulf Oil L.P. – a distributor of fuel products and lubricants in Boston

Distribution Announcements
Below are the distribution announcements for the week.  I missed PBFX’s Thursday distribution announcement in the chart below.  At this point, almost all MLPs have announced distributions.  There remains a wide range of haves and have nots when it comes to distribution growth ability.

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