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June 11, 2017

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Week Thoughts: Sentimental-Listless

Another deflating week in MLP land, although MLPs outperformed oil prices and finished the week on a positive note with some relief Friday.  MLPs finished down 1.1% overall, in-line with utilities.  MLPs have declined 1%+ for 3 straight weeks, which hasn’t happened since November 2015 when KMI’s leverage and dividend cut drama escalated.  On the bright side, since 2010 MLPs have not recorded 4 straight 1%+ decline weeks in a row.

Oil prices continue to plague the sector.  With oil traders looking for a reason to sell oil, Wednesday’s surprise inventory build obliged and sent oil to close to year to date levels.  Natural gas and ethane prices were bright spots in an otherwise frustrating week for energy investors.
Acting Out: In company-specific news, another smaller oil player (like NS earlier this year) took to the M&A market to reach for more scale and more attention from the market.  SEMG’s $2.1bn transformative acquisition did get the market’s attention, but not the kind SEMG was hoping for.  Adding scale or growth is important, but it doesn’t come cheap.
Analyst Daze: North of the border, ENB’s investor day extended the analyst day curse, dropping 2% when no major catalyst was announced.  Like KMI, EPD, LNG, PAA, WMB analyst days, stocks don’t tend to react positively to a thorough review of midstream assets. The analyst day as catalyst hasn’t really been a thing since back in the day when ETE would announce some new twist on financial engineering each year.
Sentimental View
While still nominally a fundamental MLP investor, myself and other MLP veterans have had to become (at times) commodity analysts, chartists, credit analysts, and most recently “sentimentalists”.  The collective investor base’s feelings towards oil, energy and MLPs has become THE conversation in the sector.
What could turn sentiment and encourage buyers to rotate from utilities and technology stocks towards MLPs and energy stocks?  As discussed here, I think $50/bbl oil is the answer.  Absent $50/bbl oil, there will be opportunities to outperform on stock-specific (possibly fundamental!) factors, but broad-based fund flows aren’t likely to return without $50/bbl oil or until 2H 2017 volume ramp shows up.
Alternatively, sentiment could get so bad that we run out of sellers and it becomes a bullish setup.  If we have another 1% decline next week, we’ll explore that thesis further.
Performance Review
With all the swings in MLPs recently, we’ve experienced several key inflexion points.  There was the trough in February 2016, the OPEC cut in November 2016, and the peak in February this year.  MLPs are still up 58.1% since the 2016 bottom, and were up 8.6% year to date by mid-February, but are down nearly 12% since then, and are down around 4% year to date (through Thursday). It remains to be seen if the February peak was the high point for MLPs this year, but we’ve got plenty of time for an epic comeback.

In an effort to see if we could spot some trends in performance this year and since the latest inflexion point when MLPs peaked in mid-February.   Below is a breakdown of the 80 non-variable MLPs and 13 GPs/midstream corporations I count in my universe.  I break down that 80 into 55 midstream MLPs, 10 shipping MLPs and 15 non-midstream MLPs (e.g. EVA, CELP, CCLP).


  • Small cap MLPs outperformed in both periods, helped by takeout transactions (e.g. PTXP, VTTI, WPT)
  • Large cap MLPs underperformed, largely due to PAA and ETP weakness, but WES has also lagged
  • Large cap diversified group (ETP, EPD, OKS, WPZ) outperformed, especially without ETP
  • Natural gas pipeline MLPs have underperformed, counter to what normally happens in a weak MLP tape
  • Refinery sponsored MLPs started the year strong, but have struggled of late, likely due to capital market concerns given they rely heavily on capital markets to fund drop-downs
  • Gathering & processing MLPs have outperformed (especially producer sponsored ones), which is unusual for what is generally considered a higher risk group
  • GPs and midstream corporations have consistently underperformed (TRGP, SEMG most notably)
  • Other, non-midstream MLPs have underperformed

The playbook for weak MLP markets historically has been to own natural gas pipeline MLPs, large cap MLPs, and wholesale distribution MLPs.  But in the most recent downturn, a portfolio of gathering & processing MLPs and small cap MLPs with some diversified large cap MLPs would have outperformed.
This year has been very tricky in seeking to identify trends, because there have been big winners and losers in almost every category.  Avoiding stock-specific blow ups and catching some positive strategic announcements (like OKS, SUN or PTXP) has been the path to success.
Winners & Losers
Wide range of returns this week, with NBLX leading all MLPs.  TCP was a notable laggard as a generally defensive that tends to trade with lower beta, although ATM issuance overhang may have been a factor.

Year to Date Leaderboard
NBLX’s strong week pushed it back near the top.  The rest of the top 5 either has announced a takeout (PTXP, VTTI) a major asset sale (SUN) or is expected to be acquired (WNRL).  On the downside, TOO took over the bottom spot with another awful week.  CCLP was the only bottom 5 name that traded up this week.

General Partners and Midstream Corporations
SEMG’s under-capitalized acquisition was met with heavy selling, leaving SEMG at the bottom of the group.  On the upside, the market seems to have started to get past TRGP’s over-capitalized growth project after a rough few weeks.   Natural gas players WMB, LNG and KMI were also among the winners, while TEGP continues to lag.

News of the (MLP) World
MLPs successfully accessed the equity capital markets this week, albeit at high costs.  SEMG announced a transaction and some equity at a price that’s now a 19% premium to its current price.  TEP continues to advance on external growth away from Rockies Express, as foretold on TEP’s earning call. Finally, the number of MLPs in the AMZ shrunk again, but gained in midstream exposure.

Capital Markets

  • NGL Energy (NGL) priced public offering of 7.4mm of 9.00% Class B fixed-to-floating rate cumulative redeemable perpetual preferred units at a price of $25.00/unit, raising growth proceeds of $179mm (press release)
  • USD Partners (USDP) priced public offering of 3.0mm units at $11.60/unit, raising $34.8mm (press release)
    • Overnight offering, priced at 10% discount, and traded down 5.2% from pricing in the following session

Growth Projects / M&A

  • Semgroup (SEMG) announced $2.1bn acquisition of Houston Fuel Oil Terminal Company from investment funds managed by Alinda Capital Partners (press release)
    • 8mm barrel terminal is located on the U.S. Gulf Coast with assets located on 330 acres on the Houston Ship Channel
    • $2.1bn purchase consists of $1.5bn up front (including $785mm assumed debt) and additional $600mm cash payment before end of 2018
      • Financed with borrowings and Issuance of between $300-400mm in common shares to Alinda at $32.30/share
  • Tallgrass Energy (TEP) announced plans to develop new Tallgrass Grasslands Terminal in Platteville, Colorado oil complex (press release)
    • If Pony Express has a successful open season for its 80,000bbls/d Platteville Extension, the new terminal will serve as the origin point and will interconnect with Saddle Butte’s DJ Basin crude oil gathering system
    • Side Note: TEP CEO Dave Dehaemers filed additional share purchases this week, reiterating his confidence and personal commitment to TEP
  • USD Partners (USDP) announced acquisition of crude oil destination terminal in Stroud, OK for $25mm, and new commercial agreements (press release)
    • Acquisition will facilitate rail-to-pipeline shipments of crude oil from the partnership’s Hardisty terminal in Western Canada to the Cushing, OK crude oil hub
  • Crestwood (CEQP) announced the completion of the initial build-out of the Nautilus gas gathering system (press release)


  • Alerian announced changes to their index series (press release), including:
    • Alerian MLP Index: Terra Nitrogen (TNH) and Teekay Offshore (TOO) removed, Noble Midstream (NBLX) added
    • Alerian MLP Infrastructure Index: no changes
    • Alerian Energy Infrastructure Index: no changes
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