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December 17, 2017

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Week Thoughts: Straighten Up, Fly Right

MLPs picked up where they left off last week, trading up each day until Friday ended the streak of positive days at 6 days.  MLPs are drifting higher, gaining steam into year end.  After two bear markets in three years, it’s nice to know all hope hasn’t been snuffed out, and there is some light rising up to meet the darkness …

Prices, Technicals and Capital Markets on the Mend
While its unlikely MLPs will finish the year flat with just nine trading days left in the year, it’s more in the realm of possible that MLPs could finish the quarter flat (-1.9% as of Friday).  A flat quarter would avoid a third straight negative streak of 2 straight negative quarters.  That would be a win after being down 9.1% for the quarter at 11/29.
Technical indicators are also improving for the MLP Index: the Index closing above the 50-day moving average for the first time since mid-October, and is close to breaking through the 100-day for the first time since March.

This week brought some hope for capital markets as well.  We got a benign reaction to the first follow-on equity offering in 5 weeks and the first $100mm+ offering since August.  The MLP market managed to digest the deal without the broad sector weakness we saw with ETP’s massive equity deal in August or with BP Midstream’s IPO in October.  The offering should be the last one of 2017, capping the least active quarter for MLP equity offerings since the global financial crisis.
Exception that Proves the Rule?
The E&P sector offered a warning to all energy companies to heed the lessons of 2017.  In a time when the market is demanding a focus on returns and prudent spending, Oasis Petroleum announced a step out purchase of Permian acreage financed with a big equity offering.  The market crushed its stock (-22% this week).
The violent reaction to OAS highlights the non-linear path towards wholesale change in any industry.  Directionally, the E&P sector is moving towards a focus on returns, but there will be some transactions that represent counter-structural moves that can reinforce the broader structural shift, especially when the market reacts like it did this week.
Expect further bumps along the way for the E&P sector’s shift in strategy, and for MLP sector’s self-funding aspirations.  The reaction Friday to MPLX’s high price tag ($10.2bn) for removing its IDRs was another reminder of the bumpy nature of the transition.  IDRs being removed across the sector is a positive, but that positive takes time to manifest itself in cash flow per unit growth, because of the upfront premiums being negotiated.
Bad Words
One quick thought on spelling bees.  My son is into spelling (this week).  My wife and I were quizzing him in the car on randomly googled words.  At some point, I asked my wife, who was born and raised in Albania, if spelling bees were a thing in her country when she was growing up.

The answer was no.  In fact, the concept of a spelling contest doesn’t make sense in Albanian, because the letters in that language have distinct sounds and those sounds are unique to those letters.  If you can hear a word in Albanian, you can spell it.  That’s the case with most other languages.  English is unique, because it’s a hodgepodge (fun word to spell!) of root words from many languages (Greek, Latin, etc.).
I hadn’t ever considered that spelling as a concept really only exists in the elementary schools and obscure sports TV channels of English speaking countries.  It’s a reminder that certain things that feel quite normal can seem silly or confusing to those seeing things with fresh eyes.  Like IDRs and maintenance capital expenditures in our world…
Winners & Losers
MMLP had a huge week on no news, and was joined by other high beta, smaller MLPs.  ETP outperformed, helped by progress on Rover construction approvals.  On the downside, high growth MLP DM underperformed, maybe on realization that even MLPs with high growth and a strong story (NBLX) have trouble raising more than $150mm in an equity offering.  EQT’s 2018 guidance announcement seemed to disappoint some RMP owners.

On the YTD leaderboard, PAA escaped the bottom 5 (replaced by FGP), while TGP’s big week narrowed the gap between first and second best this year.

General Partners and Midstream Corporations
Risk and beta outperformed in the GP and corporate group this week.  Some of the worst YTD performers rallied hardest this week (SEMG, NSH, AROC).  OKE was the worst performer and KMI underperformed.

On the YTD leaderboard, WMB and AHGP leap-frogged OKE on its underperformance.  Still just two positive names in the group, but now there are only 3 with more than 20% declines this year.

Canadian Midstream Corporations
Canada underperformed the U.S. overall this week.  Keyera led the way in Canada this week, where just 3 of 8 were positive.  Mean reversion was the trade this week: The best three performing stocks in this group were at the bottom this week, while the bottom 3 performers YTD were the best 3 performers.

News of the (MLP) World
NBLX, the best performing MLP in 2017, capped the year with a third-party M&A transaction and creatively tapped into private equity capital and traditional capital to finance it.  Then Friday certainty was achieved for MPLX’s IDR elimination and CNNX’s dual sponsor situation.  None of these transactions referenced a specific multiple, which implies that each was too high to comfortably discuss.
Also, pipeline open seasons for Permian takeaway capacity continue and private equity firms continue to deploy capital to develop oil gathering assets in the Permian.

Capital Markets

  • Noble Midstream (NBLX) priced public offering of 3.2mm common units at $48.20/unit, raising $154.2mm in gross proceeds (press release)
    • Bought deal, priced at 6.5% discount to prior closing price, traded down 0.4% from pricing in the next session
  • American Midstream (AMID) priced public offering of $125mm of 8.50% senior notes due 2021 at 102.375% of par (press release)
  • SunCoke Energy (SXCP) priced private offering of $70mm of 7.50% senior unsecured notes due 2025 at 104.25% of par (press release)

Growth Projects / M&A

  • MPLX and Marathon Petroleum (MPC) announced terms of previously announced acquisition and elimination of incentive distribution rights in exchange for 275mm newly-issued MPLX common units valued at $10.1bn (press release)
    • After this transaction, MPC will own approximately 64% of the outstanding MPLX common units
    • Transaction implies a ~17x multiple, in the middle of original MPLX guidance of 15-20x, although MPC/MPLX did not mention a specific multiple in the press release
    • Transaction is expected to close in early 1Q 2018, and is expected to be accretive to DCF in 2018 (but not per unit)
    • MPC agreed to waive 4Q 2017 L.P. distributions on the new units in excess of what would have been distributable to MPC absent this transaction (in other words, MPC has agreed to make it a cash neutral deal for 1 quarter of distributions)
  • Noble Midstream (NBLX) and Greenfield Midstream announced joint venture (Black Diamond Gathering) to acquire private midstream operator Saddle Butte Pipeline for $625mm (press release)
    • Transaction is expected to be accretive to DCF/unit for NBLX in 2018, although no acquisition multiple was disclosed
    • NBLX will fund 50% of the purchase, have 54.4% ownership, and will operate and control the system while Greenfield Midstream will own the remaining 45.6%
    • Assets include a large-scale integrated crude oil gathering system in the DJ Basin, consisting of approximately 160 miles of pipeline in operation, 300,000 bpd of delivery capacity and approximately 210,000 barrels of crude oil storage capacity
    • Saddle Butte currently has 115,000 dedicated acres from six customers under fixed fee arrangements with one customer planning to expand dedication by 24,000 acres
  • Plains All American (PAA) announced open season for Permian Basin to Corpus Christi pipeline for 575,000 bpd of takeaway capacity (press release)
    • The project would consist of existing pipelines and two new pipelines
  • Phillips 66 (PSX) and Enbridge (ENB-CA) announced open season for West Texas Crude Oil Pipeline System (press release)
    • The Gray Oak Pipeline is expected to have an initial throughput capacity of 385,000 bpd and is anticipated to be placed in service in 2019 2H
  • Noble Energy (NBL) announced it will sell its 50% interest in CONE Gathering, the GP of CONE Midstream (CNNX), to CNX for $305mm in cash (press release)
    • CNNX will now be a single-sponsor MLP with CNX owning 100% of CONE Gathering
    • NBL retains 21.7mm common units of CNNX, which it will dispose of over time
  • Howard Energy and WPX Energy (WPX) announced that their JV, Catalyst Midstream Partners, has launched an open season for a new Delaware Basin crude oil gathering system with capacity of 125,000 bpd (press release)
  • Wolf Midstream Partners announced plans for a new Permian Basin crude oil gathering and terminal system with an independent producer for 25,000 dedicated acres (press release)
    • Wolf expects to build 50 miles of crude oil pipelines with capacity of 55,000 bpd
    • Wolf Midstream was formed in June 2017, is based in Dallas and is backed by Sinclair Oil Company and Cowboy Midstream
    • This is not the Canadian Wolf Midstream backed by CPPIB that acquired Access Pipeline from Devon in 2016
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