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March 25, 2011

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Week Thoughts

Big M&A and PIPEs – flashback to 2007 this week as MLPs erase dip and grind higher
No equity offerings this week, and a recovering broader stock market led to outsized gains for MLPs, as the sector played catch up after digesting the equity issued earlier in the month.

Big Acquisition Moves Market
The biggest deal driving stock prices this week was the $1.9 billion acquisition of LDH Energy Assets by a joint venture of ETP and RGNC, both of which share the same general partner, ETE.  The deal was announced on Tuesday. RGNC gets a 30% stake in the assets. Looking at its impact on the 3 public entities involved is instructive.
First Institutional PIPE in Years
On Wednesday, RGNC announced the issuance of 8.5mm units ($204 million) directly to Kayne Anderson, Tortoise and Fiduciary, three of the biggest players in the MLP sector.  This issuance was part of the funding for the above acquisition.  The $204 million of equity equates to a per unit price of $24.00.  No word yet on what the lockup provisions for the PIPE are, but it appears as though the discount was somewhere around 5% of an average of the previous several trading days.  That kind of discount is likely only a 90 day lockup.
The PIPE buyers are happy today, sitting on a 12.7% unrealized gain on the deal in just 5 days, after RGNC closed the week at $27.05 per unit.  RGNC traded very well after the deal, especially compared with ETP, which announced the very same acquisition, but did not have the equity already lined up, so people are logically waiting for ETP to do a marketed equity deal before buying the stock.  As you can see in the chart below, RGNC far outperformed the sector and market on the week and ETP underperformed.

Big winner of the week: ETE
ETE, which owns the GP of both RGNC and ETP, will benefit immediately from the new equity issued at RGNC and to be issued at ETP, because very simply, more units outstanding at the MLP equals more cash for the GP.  It’s just math.
There is further potential upside to ETE if either or both of ETP and RGNC are able to increase their distribution, leading to further increases in cash flow to ETE.  The really incredible thing about this deal is that unlike other large deals we’ve seen from KMP, WPZ or EPD in the past, the general partner (ETE) didn’t have to even temporarily reduce its IDR take to make the deal accretive, which is a huge plus.  ETE gets all of the upside of the acquisition, plus the extra juice from new units issued and doesn’t have to pay anything for it. Hence, ETE’s big week relative to other public GPs, in particular KMI, which had a bad week (see below).

Other News
KMI – After the 45 day cooling off period, equity analysts were allowed to initiate coverage on KMI, the very large GP IPO from back in February, discussed here and here.  I was of the opinion when KMI went public that it would trade well and get a boost when analysts initiated coverage on the firm, because the company has historically been a darling of Wall Street and is one of the most institutionally owned names in the space.  I was clearly wrong, as the analysts that matter all initiated with a neutral rating and low price targets.  KMI sank this week as a result, as it seems like there were certainly better returns to be had in other GPs this week (like ETE).  KMI was down 3.2% this week and is now trading 1.6% below its issue price of $30 per unit.  So, if you felt slighted by your broker who couldn’t get you any units of KMI when it went public, here is your chance to get some, if you like the story, which as I have made clear in the past, is not that compelling…
EPD – Hammered a few weeks ago (and even had a mini flash crash when it traded off $10 per unit to as low as $27 and then back to around $38 in a matter of minutes), EPD has made a strong recovery from its March 15 low of $39.51 to $42.70 (an 8% increase).  Not sure what happened, but people have theorized that its wide ownership and high liquidity make it more susceptible to drops on broad panics like we saw around the Japan crisis, particularly with index funds that must own EPD as it is the largest of all the MLPs.  This is counter intuitive in that more liquidity is usually a sign of safety or at least of strength in numbers.  I guess to people trying to get out, liquidity signifies a quick exit as opposed to names with less liquidity which are not easy to exit.

Disclosure: Curbstone has positions in RGNC, EPD, BWP and KMI.  The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.

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