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May 7, 2017

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Week Thoughts: Transition Offense

MLPs struggled under the weight of oil prices and dropped 2.1% (including distributions) this week.  MLPs have declined in 3 of the last 4 weeks.  The familiar whiff of panic was in the air on Thursday and into Friday when overnight oil prices traded below $44/bbl.  Thursday was the worst day of the year for MLPs.  Friday spelled relief for oil prices and the resulting MLP snap back ended up being one of the better days of the year.
The -2.1% total return this week felt bad, but it was actually just the 3rd worst week of the year and the 3rd 2%+ decline week of the year.  Friday’s rally saved us from the first 3% decline day of the year.  As shown below, 2% decline weeks are pretty rare in big return years for the MLP Index, and tend to happen with more frequency in big negative years, as you would expect.  The average is 9 such weeks in a given year (about 17% of the time), and we are right on pace for that this year.
2 percent weeks
Transition Quarter in a Transition Year
Earnings have been mixed and noisy, particularly for gathering & processing MLPs.  EPD’s strong quarter and confident tone was encouraging, as were growth projects announced by others this week.  But the ramp in volumes cash flow from existing assets is always on the come, just out of reach, like the proverbial carrot on the stick or an empty email inbox.
Most MLPs expect a strong second half for volumes. Some of those same MLPs are announcing new projects that will contribute to 2018/2019 cash flow, but will begin contributing financial burden immediately, including with equity issuance or borrowings.
PAA is the last big MLP to report results next week, and their results should echo what we’ve heard so far:  EBITDA growth eventually improving leverage, but heavy equity issuance in the meanwhile and lackluster cash flow per unit growth until leverage stabilizes at a more comfortable level.
There are certainly reasons to be optimistic, especially at current valuations.  MLPs are making progress on de-leveraging and simplifying their capital structures.  They are able to access the capital markets, and their customers are signing up for needed incremental infrastructure.
But without scale, without assets in the right locations, or some unique competitive advantage (like drop downs or a producer sponsor), its hard to compete.  Winners will continue to win and losers will continue to lose, unless you’re EPD, and then your stock price is heavily influenced by fund flows into major MLP products.
Winners & Losers
The list of losers was long this week, but the bottom 5 shown here are not the widely-owned names that hurt most MLP investors.  ETP, WES, EEP and HEP were all down 5%+ this week, and many other big MLPs were down nearly as much.  Uncertainty related to Colorado production after the tragic house explosion related to an old Anadarko well seemed to weigh on many MLPs this week.
ARLP’s strong results helped it lead the way for the week.  CNNX gave up most of its gains from last week despite strong results and acreage activity.  SXCP made it two weeks in a row in the top 5.
YTD Leaderboard
It has been quite a fade among the top 5 over the last few weeks, with a high rate of participation in that fade.  Each of the top 5 from last week was down, except GLOP, and each of the bottom 5 was negative as well.  NBLX remains on top of the sector, but not flying quite as high as it was.
General Partners & Midstream Corporations
TRGP was crushed Thursday (-11%) after announcing weak results, increased capex and expressed no qualms about issuing ATM equity to fund it.  On Friday, TRGP managed to claw back some of its losses on Friday, but still finished as the biggest loser of the week.  Strong results from AHGP, LNG and TEGP helped keep them positive and atop the group.
AHGP went from worst to first (like KMI did last week), as consistent follow-through in performance of this group has been lacking.
AHGP went from worst to first (like KMI did last week), as consistent follow-through in performance of this group has been lacking.
News of the (MLP) World
Plenty of growth announcements this week, including more than $1bn of drop-down acquisitions, 2 new pipelines, 3 new processing plants, a major Canadian merger.  One of those processing plants was amazingly announced outside of Texas, Oklahoma or the Marcellus, which hasn’t happened in a while.    Also, the first GP IPO in two years ended up being the first GP IPO in at least 10 years to trade down on its first day.
Capital Markets

  • Antero Midstream GP (AMGP) priced IPO of 37.25mm shares at $23.50/share, raising $875.4mm in gross proceeds (press release)
    • Priced at the midpoint of the offering range, no upsize to the amount raised
    • First GP IPO since May 2015 (EQGP and TEGP)
    • Priced at record low 1.36% forward 12-month distribution yield, besting the 1.36% current yield pricing of EQGP and the 2.15% forward 12-month yield of TEGP
    • Opened at $22.15 and closed at $22.00/unit, down 6.4% from pricing in its first session
  • Magellan Midstream (MMP) filed equity distribution agreement to sell up to $750mm at-the-market (filing)
  • EnLink Midstream (ENLK) priced offering of $500mm of 5.45% senior notes due 2047 at 99.981% of par (press release)

Growth Projects / M&A

  • Canadian midstream company Pembina (PPL) announced acquisition of Canadian midstream company Veresen (VSN) for approximately C$9.7bn (press release)
    • PPL offered for each VSN share either 0.4287 PPL shares or $18.65 in cash, representing a 22.5% premium to VSN prior day’s closing price
    • The merger would create the third largest energy infrastructure companies in Canada with a pro-forma EV of C$33bn
  • Shell Midstream (SHLX) announced acquisition of Refinery Gas Pipeline, Delta Pipeline and Na Kika Pipeline for $630mm from sponsor Shell (press release)
    • Price reflects 8.4x next 12 months EBITDA
  • TCP Pipelines (TCP) announced $765mm price for previously disclosed drop down acquisition of 49.3% of Iroquois Gas Transmission System and 11.8% interest in Portland Natural Gas Transmission System (press release)
  • Enable Midstream (ENBL) announced a new Anadarko Basin rich gas takeaway project (press release)
    • Project Wildcat will provide 1 bcf/d of rich gas transportation from Oklahoma to North Texas to be processed at the 400 mmcf/d Godley processing plant owned by ETP
    • Expected in service by the end of Q2 2018
  • Three new processing plants were announced:
    • Crestwood Equity (CEQP) to construct 30 mmcf/d Bear Den plant and associated pipeline for $115mm on the Arrow System in the Bakken (press release)
    • Targa Resources (TRGP) two new plants in the Midland and Delaware Basins, representing 450 mmcf/d of processing capacity (press release)
  • SemGroup (SEMG) announced new Canton natural gas pipeline to connect its processing complex in northern Oklahoma to the STACK play in the central portion of the state (press release)
    • 24-inch pipeline will extend 50 miles with 200 mmcf/d initial capacity and will be in-service by year-end 2017
    • Backed by commitments from investment grade customer
  • Navios Maritime (NMM) acquired a 2009 Japanese Capesize vessel of 180,274 dwt for $28.3mm (press release)
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