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March 16, 2014

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MLP Week Thoughts: Wide Open

MLPs were down, but outperformed the broader market this week (MLP Index: -0.5%, S&P 500: -2.0%).  Yield-based equities overall traded well (utilities traded up, REITs were roughly flat) helped by week-over-week declines in the interest rate on the U.S. 10-year of 14 basis points down to 2.65%.  Dropping interest rates seemed to outweigh universally lower energy commodity prices, led by ethane (-7.5%).  It was a strong showing for MLPs that might have been stronger if not for the 4 equity offerings MLP investors had to digest.

Weekly MLP Review_3-14-14

With earnings season behind us, transactions will be the primary catalysts for relative MLP performance.  A couple of possible exceptions could be analyst days that happen for several MLPs prior to the next earnings cycle.  I’ll be in Houston next week for the EPD analyst day, followed by some other MLP-related events that I hope will be instructive.  Many have speculated that EPD might be gearing up to announce an ethane export project, I am sure that will be a major topic of discussion next Tuesday, especially with ethane prices back below $0.30/gallon.
Poll Results
Results were inconclusive from last week’s poll regarding the ubiquitous “innings” question.  Below is a summary, but as of this writing the middle innings had a slight advantage over the 7th inning stretch.

Poll Result_Inning

The question of innings is tricky, because it can mean different things to different people.  Is the question about where we are in the life-cycle of (1) MLP investment returns, (2) MLP participation in infrastructure build out, or (3) the MLP investor base?
The opportunity set for MLPs seems to have some legs to it.  Recent IHS estimates have pegged the required U.S. energy infrastructure investment at around $890bn total over the next 12 years.  If the U.S. energy infrastructure sector, including MLPs and natural gas pipeline corporations, is roughly $650bn of enterprise value, then one way to look at it is that MLPs have more than 100% to go in the next 12 years.  That line of thinking would argue for the middle innings answer.
The maturity of the MLP investor base may be closer to late innings.  Fund flows alone don’t seem to be enough to make the entire MLP tide rise these days.  MLPs with distribution security and growth are seeing investment flows, but it seems to be at the expense of other, less well-positioned MLPs.  It’s becoming more of a zero-sum game.  Institutional capital continues to flow into the sector from new places, but the sector is approaching REITs and Utilities in size, so it is possible that the expansion of the investor base may be entering a twilight period, which would argue for the seventh inning stretch answer.
Yet another way to think about the innings question relates to super-cycles of infrastructure build out.  We are in the midst of such a build out to expand the onshore infrastructure to accommodate growing sources of supply in the Marcellus, in Texas, in Canada and in the Bakken.
The next super-cycle of MLP infrastructure investment has already begun: the build out of infrastructure that’s required to connect the U.S. with the rest of the world with LNG liquefaction, LPG export and (potentially) ethane export facilities. In that sense, another game is starting while one is ending, like you will see late this week with the early NCAA Tournament games and their staggered start times.  That’s the way I like to think about it, that the current game is in the middle innings, but another game is already beginning.
Selections Show
Wherever we are in the game, it’s clear that selection has never been more important in the MLP space.  The number of MLPs from which to choose from has never been greater, the level of noise and distracting content (present blog excluded) around the sector has never been higher, and the consequences of misallocating investment dollars within the MLP space have never been greater (see BWP).
The NCAA Tournament starts this week.  With the rise of the mid-Major conferences, the lack of 4-year star players at big-time programs, and conference hopping, the NCAA Tournament has become more competitive and harder to handicap.  The perception now is that the tournament is more wide open than ever.  That makes choosing winners in your bracket harder than ever.  Sounds familiar…
So, good luck with your MLP and NCAA bracket selections this week.  In both cases, remember it’s impossible to be 100% right, more critical to winning is avoiding the big losses that can bust your bracket (or portfolio).
Winners & Losers
ENLK was the runaway winner this week, its first week after the close of the Devon Midstream merger and after the name change to EnLink Midstream.  Newsmakers SMLP and APL had very good weeks as well, up more than 5% each, despite each issuing equity in one form or another.  Neither of the other two equity issuers (ACMP and SDLP) made the bottom five, which is a sign that their offerings were also well-received.  5th best performing MLP ARP was helped by the announcement that it would be added to the Alerian MLP Index.  


Year to date, ENLK popped up close to the top of the list, alongside PSXP, which regained the YTD lead this week from GSJK.  TEP stayed in the top 5, while TLLP moved up to replace CELP.  On the negative side, the weak got weaker for the most part, with BWP, NRP, EPB and EROC all trading down for the week.  CMLP replaced APL to round out the bottom 5.


News of the (MLP) World
In case you were wondering, the MLP capital markets are wide open to issuers of debt, equity and even preferred equity.  This week we finally got our first $1.0bn+ MLP equity offering week, with 4 transactions for a combined $1.2bn of equity issued.  We also saw $1.8bn worth of new MLP bonds issued across 4 offerings.  And APL priced the first ever midstream MLP-issued preferred equity offering.   The $1.2bn of equity this week represents approximately 36% of the total equity issued by MLPs in public offerings year to date ($3.4bn).
Also, on Friday it was announced that BWP and PVR were dropped from the Alerian MLP Index, replaced by PSXP and ARP.  There were several other changes announced to other Alerian indexes that seemed to impact MLP stock price movements, which you can review for yourself at



  • Access Midstream (ACMP) prices public offering of 8.0mm common units at $54.85/unit, raising $438.8mm in gross proceeds for selling unitholders (press release)
    • 100% secondary with proceeds going to funds of Global Infrastructure Partners
      • GIP has now sold 44.8mm units in 5 secondary offerings since ACMP went public in 2010
      • GIP has received gross proceeds of $1.8bn from those 5 offerings, including $1.2bn in 3 offerings in the last 7 months
      • For comparison, including the IPO, ACMP has issued $1.5bn worth of primary units in underwritten public equity offerings
    • For more on the history of GIP and ACMP, I would point you to the post I wrote when GIP bought the additional 50% G.P. / IDR stake in ACMP in June 2012 (Chesapeake: When 100x Cash Flow is a Fire Sale)
      • Since that purchase, the annualized cash distributions just to the IDRs and 2% G.P. interest has grown 1087% from $6.5mm to $77.2mm
    • Overnight offering, priced at 4.5% discount to prior close
  • Summit Midstream (SMLP) prices public offering of 9.0mm common units at $38.75/unit, raising $348.8mm in total gross proceeds, including $205.4mm in primary proceeds to SMLP and $143.4mm in proceeds to selling unitholder (press release)
    • Mix of primary and secondary units (SMP Holdings is selling unitholder)
    • Offering upsized from original 8.0 unit offering, with all of the upsize sold by the selling unitholders (not primary issuance)
    • Use of proceeds: to partially fund acquisition
    • One day book-build, with a file-to-price decline of 3.1%, and then the unit price popped
  • Seadrill Partners (SDLP) prices public offering of 10.4mm common units at $30.60/unit, raising $318.2mm in gross proceeds (press release)
    • Overnight transaction priced at 3.6% discount to prior close
  • Calumet Specialty Products (CLMT) files equity distribution agreement to sell up to $300mm of common units at-the-market (filing)
  • Markwest Energy (MWE) files equity distribution agreement to sell up to $1.2bn of primary common units and 4.0mm secondary units at-the-market (filing)
  • Atlas Pipeline (APL) prices upsized public offering of 4.4mm 8.25% Class E Cumulative Redeemable Perpetual Preferred Units at $25.00/unit, raising $110.0mm in gross proceeds (press release)


  • Western Gas (WES) prices $100mm of its 2.60% senior notes due 2018 at 100.857% of par and $400mm of its 5.45% senior notes due 2044 at 98.443% of par (press release)
  • EnLink Midstream Partners (ELNK) prices the following issues for total proceeds of $1.2bn (press release):
    • $400mm of its 2.70% senior notes due 2019 at 99.85%
    • $450mm of its 4.40% senior notes due 2024 at 99.83%
    • $350mm of its 5.60% senior notes due 2044 at 99.925%
  • DCP Midstream (DPM) prices $325mm of 2.70% senior notes due 2019 at 99.41% of par and $400mm of its 5.60% senior notes due 2044 at a price of 99.006% of par (press release)
  • Martin Midstream (MMLP) prices $150mm add-on to its 7.25% senior notes due 2021 at 103.0% of par (press release)
    • MMLP will use the proceeds to pay part of the $182.8mm redemption price for its 8.875% notes due 2018 that have been called for redemption

M&A / Growth Projects

  • Summit Midstream (SMLP) announces drop-down acquisition of Red Rock Gathering Company from Summit Investments for $305mm (press release)
    • Acquisition to be funded with $110mm of credit facility borrowings and with the proceeds from SMLP’s public equity offering
    • SMLP acquiring the assets at an 8.7x next 12 months EBITDA, including an additional $19mm of capital expenditures
    • Red Rock’s assets include:
      • 1,480 miles of low-pressure and high-pressure pipeline in western Colorado and eastern Utah within the Piceance Basin
      • 54,000 horsepower of compression
      • Two processing plants with 50 MMcf/d of processing capacity
  • Seadrill Partners (SDLP) announces that its 51%-owned subsidiary Seadrill Capricorn Holdings will acquire all of the ownership interests in the entities that own and operate the West Auriga, a drillship operating in U.S. Gulf of Mexico (press release)
    • SDLP’s portion of the net purchase price will be $355.4mm
    • West Auriga is a 6th generation, dynamically positioned drillship delivered from the Samsung shipyard to its current customer, BP, in October 2013
    • The drillship is contracted through 2020 at a dayrate of $565,000/day
  • Atlas Pipeline (APL) announces that it has retained Citigroup to begin a strategic review of its 20% interest in the West Texas LPG Pipeline LP (press release)
    • West Texas LPG Pipeline LP owns a 2,295 mile common carrier y-grade NGL pipeline running from the Permian Basin to Mont Belvieu
    • The pipeline is operated by a subsidiary of Chevron Corp, who also owns the remaining 80% interest in the pipeline
    • Potential proceeds will be used to fund part of APL’s significant growth opportunities in its core operating areas
    • Chevron announced in January that it was seeking buyers for its 80% interest in the pipeline, and APL has discussed potential interest in buying Chevron’s stake, but it looks like they would rather sell
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