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November 19, 2017

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Week Thoughts: Renovating in Place

The MLP boycott continued this week with MLPs plumbing fresh 2017 lows on Tuesday and early Wednesday, before a modest reversal that left MLPs down 2.7% on the week overall.  Oil prices were lower early in the week, but recovered to finish basically flat, along with the S&P 500 and utilities.  MLPs were the negative outlier.

MLPs dropped 1.7% each of the first two days of the week.  It was the first time the MLP Index had declined 1.5%+ on consecutive days since June 2016, and the close on Tuesday was the first under 260 for the Alerian MLP Index since April 2016.
No clear catalysts drove the selloff, it seems to be weak sentiment combined with seasonal weakness that follows 3Q distribution payments and precedes fresh allocations every January.  Just like its “too soon” to make certain jokes about things, including the stunning onslaught of sexual misconduct reports lately, it may be too soon for investors to buy MLPs.
Under Construction
I moved to the suburbs of Philadelphia four years ago this month.  We moved cross-country into a house in desperate need of renovation.  We moved in anyway and chose to “renovate in place”.  We lived in that house as new hardwood floors were installed, the kitchen was gutted and replaced, a mudroom/laundry room was built, and siding was replaced.  It was a brutal few months.  I could feel others in the house questioning my grand vision of the finished product.  In the end it turned out ok, but not something I’d recommend.

It wasn’t exactly like the 1986 Tom Hanks film Money Pit (no falling bathtubs or burned up kitchen wiring), but at times it felt like it.  If you remember that film, Hanks’ character and his wife bought a fixer-upper and the film chronicles their misadventures on the renovation path while living in the construction zone.
The house featured in the film for exterior shots is a real house on 5.5 acres on Long Island, with 14,000 square feet and 10 bedrooms.  That house was listed in real life this fall for $5.9mm, read more about it here.

MLPs are similarly a work in progress.  The sector many of us counted on for consistent returns for years has fallen into disrepair.  2017 has proven a fresh coat of paint (higher commodity prices, production growth) won’t restore it to its former glory alone.
The midstream sector needs more than a facelift, and most of the stakeholders (investors, management teams, maybe not IPO bankers) recognize the need for structural change.  That change is underway, with MLPs eliminating IDRs, resetting payout ratios to more reasonable and sustainable levels, working leverage lower, easing up on capital spending.
While the sector seems in disarray today (like my house did halfway through the renovation), things can come together quickly.  Partnering with management teams who share your realistic vision of what constitutes a sustainable midstream business is the best way to play the eventual recovery.
While some MLPs will crash through the ceiling like the bathtub in Money Pit, and it might feel like the stairs are collapsing beneath your feet at times, winners will emerge.  Midstream companies will continue to play a critical role in connecting abundant North American resources with demand, both foreign and domestic.
Winners & Losers
No big gainers among the top 5 this week, but ETP was notable as an outperformer.  Familiar names among the bottom 5 that have been hammered post-earnings, like BPL, NS and APLP.  NGL gave back some of its big gains from last week.

On the YTD leaderboard, the top 5 returns aren’t as robust as they once were, but there are a few MLPs with 20%+ gains so far this year.  GEL climbed out of the bottom 5 this week, replaced by NS, and EEP continues to drift lower.

General Partners and Midstream Corporations
Each general partner and midstream corporation was negative this week.  For a second straight week, SEMG was the worst performer of the group, down another 8.4%.  ETE was close behind, gaining attention by taking a big fall after the long ETP, short ETE call publicized by Hedgeye.  TEGP was dragged into the bottom 5 as well, although it’s unclear why.  LNG’s earnings and confidence on Corpus Christi 3 FID helped it outperform slightly.

Still just three positive returns among the group YTD, and now two with declines greater than 40%.

Canadian Midstream Corporations
Headlines around an oil spill on the current Keystone pipeline weren’t enough to stop TRP from outperforming this week.  ENB’s price and expectations for its December analyst day continue to fade, dragging down a few others this week.

Pembina still leads the group YTD, Keyera lost a few spots this week, and the spread between ENB and TRP continues to grow.

News of the (MLP) World
Despite one of the biggest drop-down transactions ever in the MLP sector and $2bn worth of preferred equity issuance, it wasn’t a big week for new news.  Notable that TEP continues to work on reducing impact of contract roll-offs with open seasons for Pony Express, and TEP CEO Dave Dehaemers continues to express his disgust for the unit price with purchases.  Insider buying has picked up a bit across the sector with Grant Sims stepping up as well.  It should be a light news week with Thanksgiving, but last year there was an equity offering by ENBL on Tuesday before Thanksgiving, so keep your head on a swivel.

Capital Markets

  • Energy Transfer (ETP) priced $1.5bn worth of Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (press release), including:
    • $950mm Series A units with distributions fixed at 6.250% for 5 years, then switch to 3-month LIBOR +4.028%
    • $500mm Series B units with distributions fixed at 6.625% for 10 years, then switch to 3-month LIBOR +4.155%
  • DCP Midstream (DCP) priced $500mm of 7.375% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (press release)
    • Distributions fixed at 7.375% for 5 years, then switch to 3-month LIBOR +5.148%
  • Enbridge (ENB-CA) filed a $4.9bn mixed shelf (F-3 filing)

Growth Projects / M&A

  • MPLX announced their final dropdown of refining logistics assets and fuels distribution services from sponsor Marathon Petroleum (MPC) for $8.1bn (press release)
    • The assets are expected to generate an annual EBITDA of $1bn (8.1x multiple), expected to be immediately accretive to DCF/unit
    • Transaction funded with $4.1bn in debt and 111.6mm new MPLX common units and 2.3mm GP units ($4bn)
    • MPC has also initiated the negotiations with MPLX for MPLX to purchase IDRs for MPLX common units (targeting a close concurrent with the dropdown on 2/1/18)
  • Tallgrass Energy (TEP) announced two binding open seasons (press release), including:
    • Open season on the Pony Express Platteville Extension with a 11/29 deadline
    • Open season for commitments to transport crude petroleum from Rooks County, KS to the Ponca City Refinery in OK with a 12/13 deadline
  • Williams Partners (WPZ) announced $85mm Transco expansion project (press release)
    • Expected capex is $85mm and expected in-service date is late 2020


  • Grant Sims, CEO of Genesis Energy (GEL), purchased 44,263 GEL shares for $1.01mm (filing)
  • David Dehaemers, CEO of Tallgrass Energy’s (TEP), purchased 22,114 TEP shares for $971k (filing, filing)
  • The Nebraska Public Service Commission announced it will issue its decision on whether to approve the permit to allow construction of the Keystone XL pipeline on 11/20 (Reuters)
    • This is the last regulatory hurdle for the pipeline project, although TransCanada still needs to re-confirm producer commitment levels prior to moving forward with the project
  • Unrelated: The existing Keystone liquids pipeline owned by TransCanada reportedly spilled 5,000 barrels in northeastern South Dakota (Reuters)
    • Water sources not affected, leak isolated and contained, pipeline was shut down


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