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June 22, 2014

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Week Thoughts: Where There's Smoke, MLPs on Fire

MLP price action this week was event-driven, with M&A and restructuring driving certain MLPs higher, while $1.5bn in MLP equity offerings pushed certain prices lower.  Some of those events turned out to be more smoke than fire (at least for now), but prices reacted nonetheless.  When the smoke cleared, despite some very high flying individual names, the MLP indexes were positive (Alerian +1.1%), but underperformed the broader market (S&P 500 +1.4%), and were well behind the Utility Index (UTY), which rose 3.1%.  Aside from positive M&A
Commodity price oscillations were well within typical volatility bands this week, and were probably not much of a factor when compared with MLP news flow and the market-wide yield grab.
Weekly Review_6-20-14
Winners & Losers
General partners WMB and TRGP grabbed the big headlines and very big stock price moves, but there was a fair amount of volatility among lowly MLPs as well.  Drop-down MLPs dominated the top 5, led by recently IPO-ed shipping MLP GLOP and PSXP.
Drop-down MLPs were also well-represented in the bottom 5 this week (SDLP, ENLK and TLLP).  SDLP was under pressure on its equity offering.  ACMP had the worst week of any MLP.  ACMP closed up nearly 2% on the day of the WMB/WPZ transaction announcement, but dropped steadily the remainder of the week as investors re-evaluated the transaction and the future growth potent
ial of the combined “New WPZ”.
HCLP bounced back from a bottom 5 spot last week, but no other repeats on the top and bottom 5 this week.


PSXP has passed the century mark on year-to-date total return.  More impressive, GLOP priced its IPO at the end of the first week of May and is now up 70.9% since then.  All 5 of the top 5 MLPs YTD are expected to growth distributions at a much faster rate than the average MLP. In past years, we’ve seen turnaround stories with limited growth prospects creep into the top five just on re-valuations or a perceived turnaround.  This year, capital is chasing growth MLPs.


EROC leapfrogged NRP into the 3rd worst spot this week, which USAC joined the bottom 5, looking a bit out of place as a growth MLP among the biggest YTD losers.


IDR Maneuvers: Past and Present
This week, ENB and EEP announced an agreement to eliminate existing IDRs and replace with a single 23% tier (press release)

  • Parent ENB will waive its existing IDRs in exchange for 66.1mm Class D units and new incentive distribution units that entitle ENB to receive 23% of incremental cash distributions above its current distribution of $0.5424/unit
  • Total % G.P. take goes from around 17% to 0%
  • Class D units valued at $2.045bn at pre-announcement price of $30.94/common unit
  • IDRs were entitled to an annualized distribution of $131.3mm, implying that the $2.045bn EEP is paying 15.6x that distribution to replace it with a new obligation
  • The Class D units will be convertible to common units in 5 years, and will receive the same per unit distribution as Class A common units

The EEP IDR restructuring transaction is a cross between “capping the IDRs” whereby the top tier of IDRs is permanently reduced, and a “G.P takeout” whereby all the IDRs are eliminated.  Other MLPs have in the past reduced their incentive distribution rights on a permanent basis, but it is rare that it occurs when there is a public general partner (TCP, SXL being exceptions), and never for the amount of value EEP paid ($2.045bn).  Below is a list that I don’t claim is comprehensive.

  • December 2002: EPD’s G.P. agreed to eliminate its 50% top tier, with no consideration paid to the G.P.
  • March 2004: NS capped its IDR tiers at 25%, no compensation (that I could find) was granted to NS’s G.P.
  • December 2006, Teppco Partners (TPP) issued 14,091,275 units (valued at $562mm at the time) to its G.P. in exchange for removing 50% top tier.
  • July 2009: TCP’s sponsor agreed to forego its top IDR tier (50%) and reset its IDR tiers to 2% in exchange for 3.7mm common units, valued at around $130mm at the time.
  • SXL agreed to change the composition of its IDR tiers (changing 25% tier to 37%, but making the distribution growth gap from 37% to 50% much wider than it had been for the change from 25% to 50% tier) in exchange for $201mm note to its GP.

The value paid by EEP for this IDR change is somewhere between the above partial takeout transactions and the full G.P. takeout transactions that happened in the 2007-2010 timeframe.

  • MWE (buying MWP), NRGY (NRGP), BPL (BGH), MMP (MGG), PVR (PVG), and EPD (EPE) all eliminated their IDRs by buying out their publicly traded GPs

A few other MLPs with privately-held G.P.’s also eliminated their IDRs in exchange for MLP L.P. equity (e.g. EROC and NRP).
News of the (MLP) World
An overwhelming amount of news to process this week, but there were a few big trends worth noting.  The way the ACMP transaction went and the way the TRGP/NGLS acquisition by ETE was being speculated (where RGP would be merged into NGLS post acquisition), the sector’s mid-cap growth MLPs are at risk of having that growth diluted for the purposes of solving some other MLP or GP’s problem.  That trend makes growth MLPs scarce, and drives more capital into the remaining MLPs that have visible growth.
The other big picture item is the first MLP IPO filing by a major integrated oil and gas company (Shell Midstream).  If more majors launch MLP strategies, it reduces the overall pool of assets for existing MLPs to acquire, which is another argument in favor of MLPs with growth that is not dependent on 3rd party acquisitions generally.

  • Williams Companies (WMB) prices public offering of 53.0mm shares at $57.00/unit, raising $3.0bn in gross proceeds (press release)
    • One day marketed offering, pricing 1.7% above its pre-announcement price
    • Proceeds to be used to finance the acquisition of the G.P. of ACMP
  • Shell Midstream Partners (SHLX) files initial registration statement to raise up to $750mm in an MLP IPO (filing)
    • Assets at IPO:
      • 43% interest in Zydeco Pipeline Company, which will own the Ho-Ho crude oil pipeline system
      • 28.6% interest in Mars Oil Pipeline Company, which owns the Mars crude oil pipeline
      • 49% interest in Bengal Pipeline Company, which owns refined products pipeline that connects four refineries in Louisiana with refined products storage in Baton Rouge and connects with the Plantation and Colonial refined products pipelines
      • 1.612% interest in Colonial Pipeline Company, which owns the largest refined products pipeline in the U.S.
    • Shell has not included assets subject to a right of first offer (ROFO) like we have seen others do recently (VLP, PBFX, PSXP, etc.), but the S-1 indicates that Shell is planning to use this vehicle as a growth vehicle for its midstream assets in the U.S.
  • NGL Energy (NGL) prices offering of 8.0mm common units at $43.85/unit, raising $350.8mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close
    • NGL unit price declined 3.0% from pricing in the next trading session
  • Seadrill Partners (SDLP) prices offering of 6.1mm common units, raising $200mm in gross proceeds (press release)
    • Underwriters bought the deal and will sell the shares themselves over time, according to the press release
    • Press release offered no pricing data, but gross proceeds imply a $32.80/unit price, equal to closing price pre-announcement
    • In addition to the public offering, parent Seadrill Limited (SDRL) will purchase an additional $100mm at an equivalent price to the amount sold to underwriters
  • Viper Energy Partners (VNOM) prices IPO of 5.0mm common units at $26.00/unit, raising $130mm of gross proceeds (filing)
    • After pricing $5.00 above the range (30% above midpoint), VNOM opened trading at $31.50 (+21.1% above pricing), and closed its first day at $32.35 (+24.4%)
    • Easily the most successful variable distribution MLP IPO of all time just looking at the first 2 days of trading
    • VNOM would rank in the top 5 of all time MLP IPO pops, but still a long way to go to match EMES as the most lucrative first year of trading for an MLP all time (+400%)
  • Foresight Energy Partners (FELP) prices IPO of 17.5mm common units at midpoint price of $20.00/unit, raising $350mm of gross proceeds (filing)
    • 6.75% implied yield
    • On its first trading day, FELP opened at $19.00 (-5.0%) and closed at $19.06 (-4.7%)
  • Emerge Energy (EMES) prices secondary offering of 3.5mm units at $109.06/unit, raising $383.4mm in gross proceeds for selling unitholders (press release)
    • Overnight offering, priced at 3.35% discount to prior close
    • Selling unitholders include an Insight Equity subsidiary, members of management and the board of directors
  • Crestwood Midstream (CMLP) announces private placement of up to $500mm of newly-created Class A convertible preferred units (press release)
    • The commitment was made by a group of investors including: Magnetar Capital, GSO Capital and GE Financial Services
    • CMLP sold $300mm of the $500mm commitment at $25.10/unit for a 9.25% yield
    • The preferred units are entitled to receive fixed quarterly distributions of $0.5804/unit, payable in cash or through additional preferred units at CMLP’s election, for the next 3 years
    • In 3 years, the preferred units are convertible to common at a conversion ratio based on the aggregate preferred units outstanding and the trading price of CMLP’s common units
  • VTTI Energy Partners (VTTI) files initial registration statement for MLP IPO to raise up to $420mm in gross proceeds (filing)
  • NextEra Energy Partners (NEP) launches IPO of 16.25mm common units with a midpoint IPO price of $20/unit, to raise $325mm in gross proceeds (filing)
    • Management indicated distribution growth expected to be 12-15% annual for next 3 years, aided by large pool of drop down assets
    • NEP is a yieldco, an MLP, will be taxed as a corporation, but has IDRs

M&A / Growth

  • Bloomberg reports that Energy Transfer is in advanced discussions to acquire Targa Resources Corp (TRGP) in a transaction valued at as much as $17bn (Bloomberg)
    • Targa shoots down rumors, but “there are no assurances whether or not discussions could resume or whether any agreement could be entered into in the future” (press release)
  • Williams (WMB) announces acquisition of the remaining 50% interest in the G.P. and 55.1mm L.P. units in Access Midstream (ACMP) for a total of $6.0bn in cash (press release)
    • At closing, WMB will own 100% of the G.P. and a 50% L.P. interest in ACMP
    • WMB plans to increase its 3Q dividend by 32% to $0.56/share
  • WMB simultaneously announced plans to have ACMP merge with Williams Partners (WPZ) in a unit-for-unit exchange at a ratio of 0.85 ACMP units per WPZ unit
    • WPZ unitholders will also have the option to take either a one-time special payment of $0.81/unit, or an equivalent value of additional common units of ACMP to compensate for lower expected per-unit L.P. cash distribution in 2015
    • ACMP is expecting to complete the merger in 2014, and is expected to have a 2015 distribution increase of 25% above ACMP’s current guidance of $2.79/unit, or 40% above current 2014 distribution guidance
    • ACMP distribution growth beyond 2015 expected to be 10-12% through 2017 with distribution coverage of 1.2x in 2015 and 1.1x in 2016-17
  • Valero Energy Partners (VLP) announces $154mm drop down acquisition (press release)
    • VLP to acquire the McKee Crude System, Three Rivers Crude System and Wynnewood Products System from parent Valero
    • Assets have $15.4mm of EBITDA in the next 12 months, making this deal exactly 10.0x EBITDA
    • Will be funded with cash on hand, making it immediately accretive
    • Assets will come with a new 10-year transportation and terminalling agreement with Valero that will include minimum throughput commitments for 90% of expected throughput volumes
  • Midcoast Energy (MEP) announces acquisition of a 12.6% interest in Midcoast Operating, L.P. from Enbridge Energy (EEP) for $350mm in cash (press release)
    • The acquisition will bring MEP’s ownerships in the entity to 51.6%
    • First drop down by EEP to MEP since MEP’s IPO
    • MEP intends to announce a distribution increase next quarter as a result of this acquisition
  • World Point Terminals (WPT) announces acquisition of two terminals in Mobile, AL for $14mm (press release)
    • Terminals will have a total shell capacity of 1.8mm barrels once necessary repairs and upgrades are made to the tanks
    • Repairs and upgrades are expected to cost $8-12mm
    • Acquisition will not have an immediate significant impact on EBITDA or distributable cash flow for WPT
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