November 27, 2016
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The MLP Index finished the week flat overall, despite big declines from SXL and ETP (13.1% combined index weight), and a 3.5% gap down in oil prices in brief trading Friday. The broad stock market grinded higher, interest rates stopped going up, and natural gas prices soared back above $3.00.
If OPEC doesn’t continue to wreak havoc on oil prices next week, and this benign backdrop can continue, MLPs should be well-positioned to finish November positive for the first time since 2013 (up 2.1% month to date). 2013 was also the last time MLPs were positive for December.
Another Arranged Marriage
Investors were caught offside in positioning around the Energy Transfer Complex when the SXL-ETP merger was announced Monday. On the 3Q ETE call, management commentary seemed to hint more towards permanent solutions for ETP and SXL IDRs, so expectations leaned more towards a buy-in or elimination of IDRs between ETE and ETP. The market also seemed to expect ETP to maintain its distribution (despite 11%+ yield), predicated on ETE support.
The market was not expecting the complex to use SXL’s lower cost of capital to drive a stealth distribution cut at ETP, although it clearly is a lever to pull (see ACMP/WPZ, MPLX/MWE, other mergers). ETP investors were surprised by the cut, SXL investors were surprised by dilution to what had been a unique story with concentrated exposure to Permian and Marcellus takeaway pipelines.
I can handle things, I’m smart! Not like everybody says…like dumb!
Growing up, Thanksgiving weekend was always a dead period for TV programming, especially on cable. Often deep cable channels would run marathons of movies. TNN (now Spike) would run an entire weekend of James Bond Films, SyFy ran through all the Planet of the Apes films in a row. And AMC would run marathons of The Godfather films.
This transaction between SXL and ETP reminded me of a few Godfather characters. Michael Corleone starts off with a small role in the family business than his older brothers Fredo and Sonny. He gains experience and takes over the family after Sonny’s death. Michael finds himself cleaning up Fredo’s messes with increasing frequency, until he finally snuffs him out reluctantly. In this analogy, Michael is SXL, Fredo is ETP.
Fredo: I’m your older brother, Mike, and I was stepped over!
Michael: That’s the way pop wanted it.
Fredo: It ain’t the way I wanted it! I can handle things! I’m smart! Not like everybody says…like dumb…I’m smart and I want respect!
Expanding the analogy further, Vito is ETE, Sonny is probably Jamie Welch and WMB is probably Connie’s husband who sells Sonny out.
In any event, the Energy Transfer saga continues with a seemingly endless stream of controversial transactions that continue to leave L.P. unitholder carnage and massive banking and legal fees in their wake.
Winners & Losers
No real theme among the winners this week. RIGP received an improved buy-in offer from its sponsor, which helped push it higher. The real action was on the downside this week. The entire Energy Transfer family of MLPs made the bottom 5, including SUN perhaps on expectations of less GP support, then SXL and ETP on the above-mentioned merger. ENBL did a very rare day-before-Thanksgiving equity deal at a wide discount that landed it near the bottom this week. FGP announced a larger distribution cut than was expected (80%), earning it the bottom spot for the sector.
Notable that SXL and FGP made it two weeks in a row in the bottom 5.
Year to Date Leaderboard
No change among the top 5 year to date performers. On the bottom 5, PSXP, SHLX were both higher, along with other sponsor-driven growth MLPs like VLP and DM. Fading the drop-down MLPs has been a winning strategy for most of the year, but at some point, they become attractive relative to more execution oriented MLPs. Perhaps the announcements by TLLP (IDR waivers and reiterated 12-15% distribution growth) provided a spark for the group.
G.P. Holding Companies and Midstream Corporations
Despite all the upheaval and violent trading at the subsidiary MLPs, Energy Transfer Equity (ETE) didn’t make the bottom 5 this week, I believe on relief that its IDR (and their option value) remain in place, and that ETE would not need to provide further support to ETP to maintain its under-earned distribution. Overall GPs outperformed MLPs, and 4 of the top 5 best performers were corporations, maybe an indication that institutional investors (who tend to be more corp-focused) were buyers in midstream this week.
News of the (MLP) World
So much for a quiet holiday week, MLPs are still hard at work trying to solve their financial and fundamental challenges. Many of those challenges at this stage involve IDRs or leverage. Neither of the big M&A announcements solved long-term IDR challenges, IDRs were a part of each deal and they bought each some time. Timing on the ENBL equity deal was surprising – I can’t recall an MLP overnight equity deal pricing the day before Thanksgiving – but showed that the market is there for 10%+ discount deals.
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