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July 1, 2016

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Week Thoughts: Those Beaches will be Open

MLPs bounced along with the rest of the market early this week, then seemed to be supported Thursday by some end of the quarter window dressing when MLPs traded up while oil traded down.  In recent quarters, portfolio managers have wanted to disavow ownership of MLPs heading into a quarterly close, but this quarter MLPs have outperformed most asset classes, making MLPs an attractive listing on a quarter-end position summary.
Oil supply and demand appears to be coming into balance.  Both API and DOE reported large inventory draws this week, while monthly EIA production data indicated the biggest month over month production decline so far in the downturn.  That’s good for the macro oil prices and bad for near-term pipeline volumes. But the quicker production declines and inventory gets drawn down, the sooner the up-cycle can begin and lead to volume recovery across the midstream space.
Everything roared back as the initial shock of Brexit wore off by Tuesday.  S&P 500, utilities, oil and natural gas all ramped into the close of the quarter.
False Alarm?
Because its beach season, let’s look at the market action the last week through the lens of Jaws, the classic Spielberg movie that overcame sketchy special effects with a great cast and a terrifying score.  At some point in the movie, Hooper (Richard Dreyfuss) and Brody (Roy Scheider) attempt to convince the mayor to shut down the beaches.  The mayor wants to keep the beaches open on the 4th of July and refuses to buy into their fear-mongering.
Later in the movie, a shark is spotted near a crowded beach and panic ensues.  People trample each other getting out of the water.  When the water is clear, the Coast Guard discovers the shark fin to be just a couple of boys pulling a prank.  The beachgoers relax, but that false alarm gives the town a false sense of security, which is soon after crushed by a real shark attack.
A week after the Brexit panic, the market seems to be taking a fairly sanguine view of the whole situation, reacting to the spike in volatility as a false alarm.  I’m not calling for comeuppance on the level of Jaws for the market, but it was a bit unnerving how quickly the market shifted from alarm to calm over the last week.  There are still sharks looming, but for now the beaches will be open.
Status Update: First Half
Below is a chart updating MLP performance for the month, the quarter and the year so far.  All are positive.  MLPs have now been positive in 4 straight months, which hasn’t happened since June 2014.  The longest  streak of positive months for the MLP Index in the last 10 years was 8 months from September 2009 through April 2010.  The longest ever streak was 15 months, starting in October 2002 and extending through the end of 2003.
For the quarter, MLPs produced total return of 19.7%, good enough for 2nd place on the list all-time best quarters ever.  MLPs have been positive for exactly 1 quarter in a row.  The longest ever streak of positive quarters is 9 quarters as MLPs emerged from the global financial crisis in 2009.
Top Quarters
It is interesting to see that each of the top 10 all-time quarters have been followed by another positive quarter.  Only 26 quarters (31% of all MLP quarters so far) have been negative, including the 5 in a row we just experienced.
MLPs seem to be on a path similar to the one they had coming out of the global financial crisis.  It will be hard for MLPs to continue to track that path, however, with the risk of UK and Europe recession, slowing China growth and after a 7 year rally bull market for broader equities.  Interest rates may be supportive, however, and if MLPs can convince the market distributions are sustainable, the spread between MLP distributions and yield available in the bond market remains very wide.
Today marks the end of the month and the quarter (and marks the beginning of a long weekend). As such, I thought I’d publish an early weekly post, off-cycle to preserve more of my July 4th weekend time.  So there won’t be another post on Sunday or Monday.  Enjoy the weekend and here’s to a continuation of the MLP recovery in 2H16.
Poll Question Recap
I posted two polls last week on the future of WMB and ETE now that the merger is off.  The responses were interesting.  For WMB, 44% of respondents believe WMB will buy in WPZ as if planned to prior to the ETE merger, 33% believe WMB cuts its dividend to support WPZ’s credit rating without a roll-up.  Only 8% believe WMB gets bought buy another company.
For ETE, it was an even split (34% each) between ETE maintaining its distribution through deleveraging asset sales or ETE cutting its distribution to support ETP.  A surprisingly high number of respondents (19%) believe ETE buys in ETP.
In any event, there remains a large amount of uncertainty surrounding both MLP families.
Winners & Losers This Month
For June, NGL led all MLPs following its distribution cut and preferred issuance.  PAA gained believers in its ability to ramp volumes when production returns regardless of the outcome of its potential GP restructuring.  Natural gas prices helped AM and CNNX rally more than 10% each.  On the downside, SUN was the most notable MLP on the list, dropping substantially on higher leverage and distribution sustainability concerns.
Looking at YTD returns, 4 MLPs have produced more than 75% total returns over the first 6 months of the year.  The drop-down and refinery-sponsored MLPs that outperformed last year have underperformed.
General Partner Holding Companies Winners & Losers this Month
Median GP returns underperformed the MLP Index in June.  AHGP led all GPs, helped by higher natural gas prices that make coal more competitive.  ETE was volatile throughout the month, but finished up nearly 14%.  SE grinded higher all month, and quietly racked up 15% total returns.
News of the (MLP) World
It turned out to be a pretty heavy news week in MLP land.  MLPs were busy filing registration statements to enable equity issuance, but there were no marketed offerings this week.  Some of that private equity money came off the sidelines to join in on a KMI project at an attractive (for KMI) multiple, another positive data point on discrete asset and project valuations.   Also, the ETE/WMB merger agreement was terminated, but attorneys and judges still have some cleanup to do there.  We can expect fallout from the deal to continue like we saw this week when several WMB board members resigned.

  • Antero Midstream (AM) filed S-3 to register $250mm common units (filing)
  • Genesis Energy (GEL) filed equity distribution agreement to sell up to $400mm worth of common units at the market (filing)
  • NGL Energy (NGL) announced closing of private placement with Oaktree, upsized from $200mm to $240mm (press release)
    • NGL also filed a shelf to register $200mm worth of equity (filing)
  • Western Gas (WES) priced $500mm of 4.65% senior notes due 2026 at 99.796% (press release)

M&A / Growth

  • Tesoro Logistics (TLLP) announced $444mm acquisition of Alaska storage and terminalling assets from Tesoro Corp (press release)
    • TLLP will acquire the assets in two separate closings, one this week ($266mm) and one in the 3rd quarter ($178mm)
    • Transaction includes $400mm in cash and $44mm worth of TLLP units issued to TSO
    • TLLP’s recent equity offering provided most of the cash necessary to acquire these assets
    • Assets are expected to generate $51mm in annual EBITDA (8.7x implied multiple)
  • Energy Transfer Equity (ETE) formally terminated merger with Williams (WMB), citing the lack of required tax opinion (press release)
    • WMB responded that it does not believe ETE had the right to terminate and WMB seemed to pivot away from forcing the merger and towards the recovery of monetary damages (press release)
    • WMB also indicated that a renewed focus on its business has begun, which hopefully means updated standalone guidance and capital expenditure plans soon
    • Late in the week, the WSJ reported that several board members resigned, including the activists that were pushing hardest for the ETE merger and were seeking to oust CEO Alan Armstrong.  The resignations were confirmed by WMB in a press release Friday (press release)
  • Kinder Morgan (KMI) announced that private equity firm Riverstone will become 50% JV partner in Utopia Pipeline Project (press release)
    • Total cost of the project expected to be approximately $500mm
    • Riverstone will reimburse KMI for 50% of costs incurred to date, will fund its pro rata share going forward, and will pay an additional $50mm to KMI to reflect value created thus far
    • The Utopia pipeline will originate in Ohio and transport ethane and propane to northwestern Ohio into another KMI pipeline for ultimate delivery to markets in Ontario
  • TransCanada closed CPGX acquisition, acknowledged existence of one of its MLP (TC Pipelines), but admitted the need to develop an MLP strategy (press release)


  • Court rejects Sierra Club argument for expanded environmental review process at FERC (Washington Examiner)
    • Significant for development of pipelines and LNG infrastructure that requires FERC approval
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