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June 24, 2012

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Week Thoughts: Yield Hunger Trumps Oil Price Drop, MLPs Uptick

MLPs outperformed most things, on average, this week, even with lower oil prices (as discussed here in my Winners & Losers post).  If I had to attribute the outperformance to anything, it would be the reminder we got from the Fed that they are doing everything they can to keep rates as low as possible for the next few years.  The Fed did not release the QE3 just yet, but did announce $267 billion more for operation Twist, which may have helped MLPs outperform despite oil price and S&P 500 declines for the week.  According to Bianco Research, The $267 billion of announced happens to be roughly equal to the amount of 0-3 year maturity securities that the Fed will have outstanding by the end of 2012.  This is the final round of Operation Twist, because there will be nothing more to twist.

ETN Cap Goes Mainstream
The press release (discussed here last week) about AMJ (via JP Morgan) capping new issuance has drawn quite a bit of attention this week.  Barron’s has an article about it in this week’s paper, but I saw several other mainstream stories about it, and several Seeking Alpha-type posts about it.

While the folks at J.P. Morgan aren’t saying publicly why they capped AMJ shares, they are willing to say what the reason wasn’t. Morningstar this week published a note saying they believed the decision was related to the widely-publicized losses in the bank’s chief investment office in London. That, says J.P. Morgan, is “wrong.”

“Our decision to cap the issuance of the Alerian MLP Index ETN is unrelated to recent losses in a portfolio held by the chief investment office,”  a J.P. Morgan spokeswoman said.

The primary questions in these articles: Will AMJ trade at a premium, because clueless retail investors will keep buying?  Will other MLP exchange traded vehicles benefit from this decision?  From my perspective, the answers are an emphatic yes and yes.
One such ETF that may benefit is the first ever actively-traded MLP ETF launched by First Trust this week.  The First Trust North American Energy Infrastructure Fund (EMLP) will be run by Energy Income Partners (i.e. industry veteran Jim Murchie).  The fund will invest in MLPs, but also utilities and Canadian energy infrastructure companies (Read more here and here).

  • Worth noting that I predicted here that there would be at least 4 new MLP ETFs in 2012 and that an actively managed ETF would likely emerge.  So far there have been 3 ETFs, including this actively managed one.  I think it’s a safe bet that we’ll see at least 4 MLP ETFs this year, especially now that AMJ has been capped.
  • I also predicted there would be less than 10 MLP IPOs, and despite there being only 1.5 MLP IPOs to date (counting EQT Midstream as the 0.5 given its currently on the road), there are 10 MLPs in registration, so chances are at this point that we’ll see another 8 MLP IPOs by the end of the year and I’ll be wrong on that prediction.

Anyway, MLPs showed some grit this week and performed well in the face of big drops for most energy companies (XLE was down more than 3%) and small drops for the S&P 500.  It will be interesting to see if oil prices bounce at some point, which would add some tailwinds behind an MLP recovery that is already happening with Fed easing and relative calm out of Europe.


News of the (MLP) World
After last week, when there was virtually no news, MLPs went bananas with the press releases this week:

  • EQT Midstream launched marketing of its IPO
    • 7% yield at midpoint of the range
    • Would be lowest IPO yield since OILT IPO last July at 6.3%
    • Will have no debt, 1.1x forward distribution for next 12 months
    • Seems like its been a while since we’ve seen traditional midstream assets in an MLP IPO.  NRGM counts for that, but it was clouded by the NRGY story (RRMS was midstream too, but clouded by its parent story).  I guess the most recent clean midstream MLP was TLLP in April 2011.  In between those two IPOs, we will have had 3 E&P IPOs, 2 variable distribution MLPs, and a compression MLP, among others.  Sometimes its good to get back to basics.  I think EQM will be snapped up and should trade well in the aftermarket.
  • Susser Petroleum Partners LP files initial S-1 (filing)
    • Wholesale gasoline MLP, in the vein of what Global Partners has become
    • Will have a traditional MLP structure with MQD and incentive distribution rights
    • Public parent company, Susser Holdings Corporaton, operates convenience stores in Texas, New Mexico and Oklahoma
  • RGP files $200mm ATM deal (filing), no press release
  • ETE and ETP announce plan to drop down assets (press release)
  • NMM announces boat purchase (press release)
  • WES Debt and Equity deals:
    • 5.0mm common units, priced at $43.88, for $219.4mm in gross proceeds
    • $520mm of 4.0% senior notes due 2022 at 99.194%, or 4.03% yield to maturity.
  • CLMT Prices Debt Deal (press release)
    • $275mm of 9.625% senior notes due 2020, priced at 98.25% of par (9.8% yield)
    • Use of proceeds to fund part of previously-announced Royal Purple acquisition
    • Upsized from $250mm to $275mm
  • PVR Partners (PVR) Sells Assets to DCP Midstream (DPM) for $63mm (press release)
    • Crossroads natural gas gathering and processing system that includes one cryogenic processing plant with 80mmcf/d , 8 miles of natural gas gathering pipe, 20 miles of NGL pipeline, and 50% interest in 11-mile residue pipeline
    • $63 million purchase price
    • PVR says assets no longer strategic, as it shifts capital deployment focus to Marcellus
    • DPM says assets are synergistic bolt on, increases market position in East Texas
  • MMLP sells assets to CNP for $275mm (press release)
    • CNP has publicly announced that it is currently in the process of evaluating the potential of an MLP for its midstream assets.  This acquisition would appear to be related to that process in some way, and these assets may find their way back into an MLP structure soon if CNP moves forward with creating one.
    • MMLP says this sale reduces non-fee-based cash flow exposure and improves credit metrics
  • EPD plans to build Propane Dehydrogenation Unit (press release)
    • 35,000 barrels per day capacity to consume propane
    • 1.65 billion pounds per year of propylene capacity
    • By comparison, PDH’s facility has 1.45 billion pounds per year of propylene capacity
  • APL Velma Expansion (press release)
  • SXL Announces Permian Pipeline Project (press release)
With MLPs down quite a bit, particularly the NGL-focused names like MWE and NGLS, Jim Cramer did his best this week to help MLP CEOs go on the offensive against low unit prices.  MWE’s Frank Semple was on Monday, and ETP’s Kelcy Warren was on with Cramer on Thursday to downplay natural gas storage and explain again how there are no basis differentials for natural gas.  MWE was down 1.8% and ETP was up 2.8% on the week.

Semple video here:

Kelcy’s video is here:
Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.

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