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October 22, 2017

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Week Thoughts: Taking the Under

MLPs dropped every day but Thursday this week, finishing down 3.3% since last Friday.  It was the 2nd worst week of the year, 3rd worst week in last 12 months.  The only 2 worse weeks: the week preceding the election (11/4/16) and the week in August when PAA declined 20.4%.  The MLP Index is at its lowest point since 8/28/17.  This came on a strong week for stocks and utilities, despite higher interest rates.  Oil prices were flat and NGL prices faded along with natural gas prices.

The big news this week was the size of the upcoming BPMP IPO at $850mm+.  It seemed to weigh on the sector this week, despite not pricing until this week.  Juxtaposed against a brand new high-growth MLP with full IDR tiers, another refinery-backed MLP announced a permanent IDR solution this week.  That solution includes substantial dilution for HEP unitholders, which new IPOs can avoid by not starting with IDRs in the first place.
Lowered Expectations
Midstream earnings season starts to roll later this week with 5 MLPs reporting, including notables MPLX and EQM.  Expectations appear low for MLP results, with past, present and future uncertainty lingering.  Uncertainty regarding past impact from hurricanes.  Uncertainty regarding current issues of leverage and coverage, Uncertainty regarding future issues of 4Q ramps in volumes, 2018 production outlook and how a producer shift towards returns focus will impact MLPs.
Nothing is ever certain, and the market is a reflection of participants’ bets on how those uncertainties will resolve themselves.  Right now, the market is taking the under, but as we’ve seen before, things can swing back the other way in a hurry.
Winners & Losers
There were very few bright spots across the MLP universe this week, and those few are not well-owned or well-followed by institutions, which probably helped them this week.  NS was the worst performing MLP this week, with PDVSA issues compounding concerns over the sustainability of its distribution.  NS did announce a flat distribution this quarter, for what its worth.  OMP gave up some of its gains from last week, but remains above IPO price.

There are still 5 MLPs with 20%+ year to date returns, but just barely.  We have some time left this year, but not that much with less than 50 trading days left in 2017.

General Partners & Midstream Corporations
GPs and midstream corps underperformed as a group, although some of the larger caps seemed to hold up better.  NSH followed NS to the bottom of the group.  Others that announced flat distributions were also sold hard (TRGP, ENLC).  AHGP was the only positive name in the group, another smaller, less followed stock.

LNG continues to trade well, and has pulled closer to the top spot for the year overall.  On the downside, NSH dropped another spot on the year-to-date leaderboard, closing in on PAGP.

Canadian Midstream Corporations
Action in Canada was interesting this week.  KML was down, but outperformed, despite the news that Trans Mountain is delayed 9 months (so far).  ENF was downgraded by Moody’s, which shined a light on ENB’s balance sheet and the increasingly unstable legs of its complex structure.

TRP took over the top spot on the 2017 leaderboard this week.  ENB and ENF dropped to the bottom two spots for year to date performance of the group.

News of the (MLP) World

Capital Markets

  • BP Midstream Partners (BPMP) launched IPO of 42.5mm common units with range of $19-21/unit, seeking to raise $850mm at midpoint price (filing)
    • Midpoint price implies 5.25% yield
    • $850mm would be the largest MLP IPO since Columbia Pipeline Partners in February 2015
    • Common units represent a 46.7% LP interest while BP will own the remaining LP interest, GP interest, and IDRs
  • Teekay LNG Partners (TGP) priced public offering of 6mm 8.5% Series B preferred units at $25.00/unit, raising $150mm in gross proceeds (press release)

Growth Projects / M&A

  • Marathon Petroleum (MPC), operator of the 1.2mm bpd capacity Capline oil pipeline, launched non-binding open season for a proposed reversal (press release)
    • If the owners (PAA, MPC and BP) decide to proceed, southbound flow could be operational by H2 of 2022
  • Global Partners (GLP) announced a $46mm acquisition of retail fuel and convenience store assets from Honey Farms, Inc. (press release)
  • Holly Energy (HEP) announced an IDR simplification agreement with sponsor HollyFrontier (HFC) (press release)
    • HFC will eliminate its IDRs in exchange for 37.25mm HEP units representing a total equity value of $1.25bn based on HEP’s prior day closing price of $33.56 (14x expected 2018 IDR cash flow)
    • HFC will now hold 59% of outstanding HEP units, a market value of $2bn
    • HFC also agreed to waive $2.5mm of LP cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration are eligible to receive distributions

Distribution Announcements
Less fireworks from distribution announcements this week, despite many more distribution announcements this week (23).

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