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October 9, 2016

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Week Thoughts: Yield Retreat No Holiday for MLPs

MLPs sold off after two straight positive weeks, as choppy, uncertain trading continues despite what appears to be certain strength in commodities.  The interest rate on the U.S. 10 Year (down 55 basis points YTD) increased 13 basis points this week, spooking all yield-oriented investment.
Commodity price strength (and a lack of MLP equity offerings) helped MLPs outperform utilities, but not by much.  MLPs are still trailing utilities YTD and over the last 12 months, even thought oil prices are up 34% this year.
The yield trade appears to be over.  Utilities, as measured by the UTY index, declined for 10 straight days until a small uptick Friday.  MLPs didn’t participate as much in the yield trade when it was a positive thing, but got caught up in the negative unwind this week.
Clearly the market is skittish ahead of the Presidential election next month and is looking for any reason to sell things that have worked.  Donald Trump’s latest implosion may be a short term positive for the market, but it may also raise concern over the congressional balance post-election.
Poll Question
Commodity prices have rebounded, onshore drilling activity has returned, capital markets have thawed somewhat, and big M&A is happening.  But there’s always another boogeyman.  Uncertainty on interest rates, winter weather, the extent of the implosion of the Republican Party and its impact on energy policy, etc.
It was a relief to see OPEC not screw up their latest meeting, it was a relief to see massive oil inventory reductions in 3Q, and it was a relief that natural gas market seems to be on solid footing heading into winter.  But relief hasn’t meant a rally, because the relief just stems selling from the “base”, investors already long.  Attracting new capital to the space after the initial bounce will take time, above all else.
Sorry, there are no polls available at the moment.
Winners & Losers
CNNX led the MLP sector this week based on: (1) an analyst upgrade, (2) strong natural gas prices, and (3) it not being in any MLP indexes, which were all down.   Other winners this week were small cap MLPs that tend to get whipped around by oil prices.
On the downside, FGP continued last week’s carnage to lead all MLPs lower.  RMP backed off last week’s euphoria a bit.  Despite some positive momentum in recent weeks, SHLX, MPLX and DKL underperformed dramatically this week.
Year to Date Leaderboard
On the YTD leaderboard this week, NRP took over the top spot, CNNX climbed back above 100% YTD.  On the downside, FGP inched closer to the bottom spot, but SHLX isn’t too far behind.
General Partner Holding Companies
General partners overall performed in-line with the MLP Index this week.  AHGP was the outlier on the upside, presumably because of natural gas price strength and its impact on the coal markets.  Kinder Morgan (not pictured below) had a worse week than any GP, giving up all of its 5% gains last week with a 6.3% drop.
News of the (MLP) World
There was an unusually high amount of M&A activity focused on a town in Texas I didn’t realize existed until this week: Point Comfort.  That was the kind of week it was for MLP transactions: smaller deals involving smaller MLPs, but some of them quite meaningful for those smaller MLPs.

  • Sunoco LP (SUN) filed equity distribution agreement to sell up to $400mm worth of common units at the market (filing)
    • SUN’s common units currently pay a 11.6% yield, so if SUN is willing to issue common equity, other options must be even more expensive
  • Western Gas (WES) announced pricing of $200mm of 5.45% senior notes due 2044 (press release)
    • Priced at 102.776% of par to yield 5.256%
  • Summit Midstream (SMLP) filed form S-3 to register the sale of up to $1.5bn of primary debt and equity securities and 35.8mm units owned by its sponsor (filing)
  • Sanchez Production Partners (SPP) launched equity marketed equity offering seeking to raise up to raise approximately $150mm in gross proceeds at midpoint of the range (prospectus)
    • Offering has a price range of $16-18/unit (9.7% implied yield at midpoint)
    • SPP is already publicly traded and prior to the launch of the equity offering traded at $10.66/unit, so if the offering priced at the mid-point, it would represent a premium of 59.4% to the pre-deal price
    • SPP traded up 29.4% on Friday following announcement of the offering and related M&A activity (described below)

Growth Projects / M&A

  • Sanchez Production Partners (SPP) announced agreements to acquire midstream and upstream assets from sponsor Sanchez Energy (press release)
    • SPP will acquire 50% interest in Carnero Processing (Targa owns the other 50%) for $47.7mm in cash and the assumption of $32.3mm in additional capital commitments
    • SPP will acquire certain producing assets in South Texas for $27mm
    • SPP will obtain an option to acquire a lease for a tract of land leased from Calhoun Port Authority in Point Comfort, TX where SPP and a JV partner (maybe NGL, see below) will construct a 350,000 shell barrels of capacity
  • NGL Energy (NGL) announced acquisition of a Gulf Coast crude oil and condensate terminal project and related assets in Point Comfort, TX from Pelorus Terminal for an undisclosed purchase price (press release)
    • Assets include 350,000 shell barrels of capacity, multiple truck unloading bays (30,000 bbls/d capacity) and vessel loading docks (20,000 bbls/hour capacity)
    • Terminal expected to be in service in April 2017
  • CNX Coal Resources (CNXC) announced drop-down acquisition of an additional 5% interest in the Pennsylvania Mining Complex from CONSOL Energy, Inc. for $88.8mm (press release)
    • Acquisition increased CNXC’s ownership to 25%
    • Funded with $21.5mm in borrowings and the issuance of convertible preferred units issued CONSOL valued at $67.3mm
    • The preferred units pay distributions in-kind or in cash equal to 11% of the issue price of $17.01/unit, which was set based on a 15% premium to 15 day average common unit price
  • EQT Midstream (EQM) announced the Ohio Valley Connector was placed into service (press release)
    • The Ohio Valley Connector is a 37-mile pipeline extension of the Equitrans Pipeline system with 850 mmcf/d capacity (650 mmcf/d of which is taken by EQT under a 20-year contract)
  • NGL Energy (NGL) announced line fill and commercial in-service date of 11/1/16 for its Grand Mesa pipeline project (press release)
    • NGL reported that the project is expected to be $18mm under budget
    • The Saddlehorn portion of the pipeline project (owned by MMP and others) began service at the end of August
  • BKEP closed asset acquisition and general partner sale to Ergon, Inc. (press release)


  • Distribution announcements:
    • TEGP +7.1% qoq, +82.3% yoy
    • TEP +5.3% qoq, +32.5% yoy
    • EPD +1.3% qoq, +5.2% yoy
    • GEL +1.4% qoq, +9.4% yoy
  • MPLX announced that longtime reader and MPC executive Pamela Beall will replace Nancy Buese as CFO of MPLX (press release)
    • Buese has accepted a role with a Denver-based public company
    • The ongoing phase out of legacy MWE executives continues, former CEO Frank Semple will retire as Vice Chairman this month
  • Vanguard Natural Resources (VNR) announced it elected not to make $15mm semi-annual interest payment on $381.8mm of 7.785% senior notes due 2020 (press release)
    • VNR decided to use the 30-day grace period following discussions with lenders and will continue to seek alternative sources of capital
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