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May 21, 2017

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Week Thoughts: Think Global, Buy Local...MLPs

MLPs finished the week strong, rallying 1.8% combined on Thursday and Friday, which was just enough to climb back to even after a 1.9% drop Wednesday.  The selloff Wednesday seemed 100% based on broad stock market weakness, a frustrating headwind when oil prices have been relatively strong of late.  WTI oil futures have traded up in 8 of the last 9 days, up 9.7% over that time.
The MLP Index has drifted uncomfortably close to that magic 300 number again, and technicals have broken down a bit with the 50-day breaking below the 200-day average (aka the “death cross”, or so I am told…).  I’m optimistic that ongoing oil strength, if its survives the OPEC meeting, will attract broader interest back to the MLP sector as MLPs are clear winners from onshore U.S. production growth extending into the next decade.
On Friday, oil futures cracked $50/bbl on the good side for the first time since 4/20/17.  MLPs have traded down 1.3% since oil last crossed $50/bbl on the downside.  Over the last year, oil has been below $50/bbl roughly 62% of the time, and MLPs have traded down pretty consistently since June of last year when oil was below $50/bbl.  It is intuitive and seems obvious, but the positive returns produced over the last year have mostly come at times when oil prices were higher than the magic $50/bbl number.
Oil and MLPs
MLPs can certainly trade down with oil above $50/bbl, but in today’s market, it doesn’t feel like MLPs can go higher with oil below $50/bbl.
On OPEC, prices seem to have beaten the group into a much less noisy submission this time around, with reports that all countries are on board to extend cuts another 9 months.  One potential caveat, though, according to Bloomberg, Saudi Arabia is dropping hints that maybe it is not jazzed about backstopping the cuts alone this time around (
Poll Question: Risk Assessment
Investors don’t seem to have great expectations for oil prices the remainder of 2017, but there are very high expectations building the last few quarters of earnings for second half volumes.  Given the extreme competition, those volumes may not benefit every MLP so they can all meet or exceed lofty second half expectations.  With that in mind, this week’s poll question tries to gauge what you are most afraid of.
Sorry, there are no polls available at the moment.
Winners & Losers
Remaining PTXP unitholders got a gift Friday when ETP tendered for the remaining publicly-held units of PTXP at a 20% premium back to its IPO price.  It was a rare LP-friendly transaction from that MLP complex.  On the other side of the coin, the Teekay complex continues to struggle, with both TOO and TGP landing in the bottom five on concerns with customer contracts for TOO specifically.  TOO was the worst performing MLP for a second straight week.
YTD Leaderboard
On a year-to-date basis, we have a new leader in the clubhouse with PTXP’s massive spike on Friday.  NBLX has stagnated recently, perhaps on uncertainty regarding the long-term impact of the recent gas explosion in Colorado.  PTXP displaced fellow Energy Transfer family member SUN from the top 5, which had its own surprise spike earlier this year.  On the downside, TOO joined the bottom 5, but not at the very bottom, as CCLP took that spot from EEP this week.
General Partners & Corporations
GPs and corporations were mixed, with some commodity beta names like SEMG, LNG and PAGP rallying a bit, and the higher multiple GPs like AMGP, WGP and EQGP lagging.  KMI continues to fade ahead of its Canadian IPO pricing next week.  The median performance of this group slightly underperformed the MLP Index.
AMGP, KMI repeat on the bottom 5, while PAGP rebounded ahead of its analyst day next week.
News of the (MLP) World
There wasn’t much micro MLP news this week.  There were some interesting transactions, but mostly on the small side.  Next week Kinder’s Canadian IPO will be critical to watch, along with any potential transactions around the PAA analyst day.  Noteworthy to see a private equity firm (Quantum) invest in midstream assets outside the Permian (in this case CNNX’s GP).  Also noteworthy to see TEP expand upstream into gas gathering.
Capital Markets

  • Delek Logistics (DKL) priced private offering of $250mm of 6.75% senior notes due 2025 at 99.245% of par (press release)
  • Two new equity distribution (ATM) agreements were filed:
    • Global Partners (GLP) up to $50mm (filing)
    • GasLog Partners (GLOP) up to $100mm (filing)
  • Tellurian Inc. (TELL) withdrew a public offering of 10mm common shares launched on Tuesday, due to adverse market conditions (press release)
    • TELL is a development company founded in 2016 by former Cheniere executives to develop the Driftwood LNG export facility and related infrastructure
    • Unusually skittish move for what has historically been a cocksure management team

M&A / Growth Projects

  • Energy Transfer (ETP) announced tender offer to acquire all publicly-traded units of PennTex Midstream (PTXP) for $20/unit, a 20.1% premium to its prior closing price (press release)
    • ETP currently owns 32.4% of PTXP outstanding units
    • Offer will expire on June 19, 2017
    • If enough units accept the tender for ETP to own 80% of the outstanding units, ETP can exercise its limited call right (per partnership agreement) to acquire the remaining units outstanding
    • Total purchase price will be around $283mm, based on 14mm common units
    • Another MLP rationalized / gobbled up by an incumbent with scale, but this time with a big premium back to IPO price, which including distributions implies 11.4% total return since IPO (pretty good vs. -14.0% for the Alerian MLP Index)
  • Noble Energy (NBL) announced sale of its Marcellus Midstream business for to PE firm Quantum Energy for $765mm (press release)
    • The transaction includes NBL’s 50% interest in CONE Gathering (owner of GP/IDRs of CONE Midstream Partners – CNNX) and 21.7mm L.P. units of CNNX (33.5% interest)
    • NBL’s final exit would seem to leave CNNX with marginally more alignment at the GP level, and with substantially more rig activity on its acreage than with NBL
  • Tallgrass Energy (TEP) announced acquisition of Powder River gathering system from DCP Midstream (DCP) for $128mm (press release)
    • Assets include 1,500 miles of gathering lines in Wyoming and is the primary gathering system for TEP’s Douglas processing plant
  • Energy Transfer (ETP) announced binding open season for Project Permian Express 3 (press release)
    • Expected to provide up to 100,000 bpd of transportation for Permian oil production and to be in service by 4Q 2017
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