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February 1, 2015

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Week Thoughts: Regency Transferred, Oil Bounced, MLPs Outperformed

MLPs were mixed this week, but outperformed the broader stock market and utilities. The Alerian MLP Index (AMZ) capped the worst January ever recorded by the MLP index with a 1.5% decline (including distributions) this week. It wasn’t all bad, as strong price performance by upstream MLPs helped the AMZE post a positive week.
Weekly MLP Review_1-30-15
The S&P 500 finished down 2.8% for the week, while utilities finished down 1.8% even with a significantly lower yield on U.S. 10 year treasuries. Oil prices finished 6.7% higher this week, including an 8.3% rally on Friday.  Natural gas spot price continued to slide, down 9.5% this week to a new 52-week low on general oversupply.
Status Update
The MLP Index has never before had 5 straight negative months, but that’s where we are now, with the index having declined each month and 16.3% overall since the end of August.  MLPs finished down for the month of January for the first time since 2008, breaking a streak of 6 consecutive years.  2 of the other 3 times when January was negative, the MLP Index was negative for the full year (2002 and 2008).
Status Update_1-30
MLPs are overdue for a bounce that sustains itself long enough for a positive month, but that’s been elusive in a steadily declining commodity price environment.  Since the OPEC meeting in November, however, the individual MLP news flow has been relatively light.
Over the next few weeks, we will be overwhelmed by MLP earnings releases and 2015 guidance releases that has a chance to highlight the resiliency of MLP cash flows in the face of falling commodity prices.  We have started to see some differentiation creep back into the MLP sector as distribution announcements and earnings releases have started rolling in.
Winners & Losers
Upstream MLPs bounced back in a big way this week, well before oil prices snapped back on Friday, and they occupy 4 of the top 5 spots.  VLP made it two straight weeks in the top 5 after its sponsor announced a faster drop down pace, which apparently was news to the market.  After announcing its role as the white knight to RGP’s distressed valuation, ETP’s price declined.  Another large-cap MLP DPM made the bottom five on deteriorating processing economics for its sponsor DCP Midstream, LLC, which carries the commodity price exposure for DPM.  TOO made it two straight weeks in the bottom five.
DPM’s poor week lands it on the bottom five YTD list this week.  Rallies in upstream (see above) helped most upstream MLP escape the bottom five (EVEP was left behind).  SDLP was flat week over week, but drops into the bottom five YTD by standing still.  On the upside, FISH continued higher and jumped from 5th place to 2nd place.
News of the (MLP) World
We got some more big M&A this week, but it was more of a cost of capital clean-up trade than strategic M&A activity. We did get another positive indicator in the face of the bleak commodity price environment when the first MLP IPO of the year launched.  The dark side of lower NGL prices showed itself this week as well, as DPM’s sponsor announced a 20% workforce reduction.

  • Columbia Pipeline Partners (CPPL) launched MLP IPO of 40.0mm units, expected to raise $800mm at the midpoint of the filing range of $20.00/unit (filing)
    • IPO yield of 3.35% at the midpoint
    • Will be the 3rd largest ever MLP IPO
    • CPPL is selling 42.6% of total units in the offering. If the underwriters overallotment is exercised, the public will hold almost all of the common units of CPPL, with NiSource retaining the subordinated units
    • CPPL will own 14.6% of Columbia Pipeline Group, the opco that will house all of NiSource’s midstream assets, which consist primarily of natural gas pipelines serving the Northeast region of the U.S., and a substantial backlog of development projects
    • CPPL will have $250mm of net debt on its balance sheet, a departure from recent hyper-growth MLP spin offs which have gone public with no debt and cash on the balance sheet to enable accretion from drop downs easily without needing to issue equity
  • Tallgrass Energy (TEP) announced plans for its sponsor to file for GP IPO (press release)
    • Tallgrass GP Holdings, which owns L.P. and G.P. interests in TEP, plans to file registration statement for IPO
    • This is the second GP IPO plan that has been announced in the last few months (EQM’s sponsor is planning a GP IPO as well)

M&A / Growth Projects

  • Energy Transfer Partners (ETP) announced the acquisition of Regency Energy Partners (RGP) in a transaction valued at $18bn, including assumed debt (press release)
    • ETP will acquire RGP in a stock for stock transaction whereby RGP unitholders will receive 0.4066 ETP units and a cash payment of $0.32 for each RGP unit
    • Energy Transfer Equity (ETE), which owns the general partner and 100% of the incentive distribution rights (IDRs) of both ETP and RGP, has agreed to reduce the IDR payments it receives from ETP by a total of $320mm over a 5 year period
    • Acquisition price represented a 13% premium to the prior closing price of RGP
    • The transaction makes ETP the second largest MLP
    • The transaction is accretive to ETE distributions per unit immediately and to ETP distributions per unit in 2016 and beyond
  • Magellan Midstream (MMP) extends open season for Saddlehorn oil pipeline another month to the end of February (press release)
    • The Saddlehorn pipeline project is designed to be a 600-mile, 20-inch diameter pipeline capable of transporting up to 400,000 barrels/day of oil from Colorado to Cushing Oklahoma
    • MMP has already received binding commitments from Anadarko Petroleum and Noble Energy


  • Alerian announced changes to AMZ and AMZE Indexes to reflect the merger between WPZ and ACMP (press release)
    • WPZ will be removed from AMZ and AMZE
    • TEP will be added to AMZ and AMZE
  • DCP Midstream, LLC, the private sponsor of DCP Midstream Partners (DPM) announced restructuring, Oklahoma City office closure, and layoffs (press release)
    • DCP Midstream is a 50-50 JV between Spectra Energy (SE) and Phillips 66 (PSX)
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