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March 31, 2018

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Week Thoughts: Winter Breaks, Stakes Still High

A strong Thursday saved the week for Midstream and MLPs, which both finished marginally positive, but trailed the broad stock market and utilities.  Oil prices were down slightly but weren’t much of a factor.  Midstream sold off Tuesday in what felt like end of quarter window un-dressing after a double digit negative quarter.

Simplifications and corporate conversions are picking up, proving to be a catalyst for those involved.  Something that did not make anyone’s list of potential catalyst is more capex announcements from companies with high leverage and high payouts, necessitating faith and asset sales. In the absence of a functioning equity market, execution of asset sales is more critical than ever.
I’ll provide more detail on the pipeline of midstream asset sales that companies are banking on in 2018 next week, but the number at least $7bn across U.S. and Canadian midstream companies.  Private equity demand for midstream is big, and it will need to be massive.
Status Update
Worst March on record for MLP Index at -6.9%, on the heels of the worst ever February.  It was also the 4th straight negative quarter for the MLP Index, and the 11.1% decline in 1Q was bad enough for 6th worst quarter ever, and worst quarter since 3Q 2015.

For the AMEI, it wasn’t the worst March ever, but close.  AMEI also didn’t have the strong start out of the gates in January that AMZ had, so its 1Q return was worse.  AMEI has a shorter history, with data just back to 2008, but this was the 4th worst quarter since 2008, and worst since 3Q 2015.

So, for both MLPs and for Midstream more broadly, the last 9 weeks has been among the worst 9 weeks we’ve had since the bloom came off the rose back in late 2014.
Yet, just like in baseball, April offers hope each year.   April is the best month historically for AMEI and is tied with January for best month for AMZ.  April has been positive for the AMZ in 12 of the last 13 years.  April benefits from being a month that leads up to ex-dates, so it catches a distribution capture bid.
With portfolios cleansed of midstream and MLPs for quarter end reporting, institutions may re-engage over the next few weeks.  This quarter’s earnings season will be upon us soon enough, and stakes are very high, although the selloff has tempered expectations.  Even with valuations setting the bar low, it will be a critical round of results, with the future of the structure and many midstream players in the balance.  More resolutions to pending strategic processes (like TEP/TEGP this week) should help.
Winners & Losers
Resolution for TEP’s simplification helped send TEP to the top of the heap this week.  DM made it two weeks in a row as worst performing MLP, and a third straight week in the bottom 5, but a 6% decline is much better than 25% last week, I guess.

DM’s staggering decline has left it down 49% YTD including distributions.  SHLX joined DM in the bottom 5, replacing EEP.  Meanwhile, PAA joined the top 5, replacing APLP.

General Partners & Midstream Corporations
Among GPs and Midstream Corps, TEGP was well ahead of the pace this week, following the simplification news mentioned above.  It was more capex, more (funding) problems for TRGP this week, the worst performer this week.

TEGP climbed out of the cellar on YTD performance, replaced by SEMG.  WMB joined the bottom 5, displacing ENLC.  KMI didn’t bounce back much after last week’s poor performance.

Canadian Midstream Corporations
Canadian midstream outperformed for a second straight week, led by a big week from ENB, which was the worst performer of the group last week.

ENB retains its spot at the bottom of the YTD leaderboard, but the gap has narrowed.

News of the (Midstream) World
News flow was heavy for a short week.  More projects announced for TRGP, a pending simplification announcement was crossed off the list, and two upstream MLPs have gone corporate.
Capital Markets

  • Dominion (D) priced a $1.55bn forward equity offering of 23mm shares at $67.85/share (press release)
    • Overnight offering, priced at a 2% discount, and traded flat from pricing in the following session

Growth Projects / M&A

  • Tallgrass Energy GP (TEGP) announced the acquisition of Tallgrass Energy Partners (TEP) in a taxable stock-for-unit merger at a ratio of 2.0 TEGP Class A shares for each outstanding TEP unit (press release)
    • The 47.6mm TEP common unit transaction will result in no distribution cut to TEP unitholders and will be accretive to both TEGP and TEP holders
    • After closing, which is expected by the end of 2Q18, TEGP will change its name to Tallgrass Energy LP (TGE)
  • Targa Resources (TRGP) announced two new cryogenic natural gas processing plants in the Delaware Basin with a combined 500 MMcf/d of capacity, a 220-mile high pressure rich gas gathering pipeline, and an extension to Grand Prix which will increase 2018 net growth capex to $2.2bn from $1.6bn (press release)
    • The two 250 MMcf/d processing plants (Falcon and Peregrine) are expected to begin operations in Q4 2019 and Q2 2020 and have fee-based agreements with an investment grade energy company
    • The two processing plants and the pipeline will cost $500mm
    • The Grand Prix NGL pipeline extension from southern Oklahoma to North Texas is expected to cost $350mm
    • TRGP stated it continues to evaluate asset sales and JVs to help finance the increase in capex
  • Alliance Pipeline, a 50/50 JV between Pembina (PPL-CA) and Enbridge Income (ENF), announced a binding open season for an additional 400 MMcf/d of capacity for 2021 (press release)
  • Navios Maritime Acquisition Corp (NNA) announced the sale of Nave Galactic, a 2009-built VLCC of 297,168 dwt, to Navios Maritime Midstream Partners (NAP) for $44.5mm (press release)
    • NAP announced 70% distribution cut to $0.125 per quarter
    • NAP also announced the sale of Shinyo Kannika for $17mm

Other

  • In addition to its equity offering, Dominion (D) announced it will pursue a debt financing of Cove Point and the divestiture of non-core assets including Blue Racer to help achieve its target parent leverage ratio two years ahead of schedule (press release)
  • Viper Energy (VNOM) will change its tax status from pass through partnership (MLP) to a taxable entity (C-Corp) via a “check the box” election (press release)
    • VNOM does not expect the election to be taxable to VNOM or its current unitholders
    • Management plans to maintain policy of distributing 100% of operating cash flow
    • VMOM’s GP, Diamondback (FANG), will exchange all of its VNOM common units (64% of VNOM) for newly issued VNOM Class B units which will not have rights to distributions from VNOM
  • Legacy Reserves (LGCY) announced transition into a corporation (press release)