As a child, I told the same joke every spring: If April showers bring May flowers, what do Mayflowers bring? The delighted answer is, of course, Pilgrims. Last month, we talked about energy infrastructure getting ready in April. What were they getting ready for? Well, oil hit $50 in May, for one, but it looks like things may just be beginning.
April showers brought May flowers
With the partial recovery in oil has come the partial recovery of MLP unit prices. In May, MLPs were up 2.5% and 51.9% off the bottom established on February 11, 2016, on a total return basis as measured by the Alerian MLP Index (AMZ). To hit previous highs, last seen on August 29, 2014, they still have 57.5% to go, though.
What else do May flowers bring? Quite literally, June fruits. With unit prices rising, many MLPs started raising equity again—specifically in the form of at-the-market (ATM) issuances. ATMs are a little more casual than a traditional secondary unit offering. No discount is typically offered as the units are sold at market prices, and the timing is also flexible. While the largest MLPs have been the ones with the largest ATM programs, continuing strong performance could lead to a greater variety of issuers.
This doesn’t mean traditional equity raises aren’t happening. To no one’s surprise, Phillips 66 Partners (PSXP) raised $655.1 million which will fund the majority of the purchase of more assets from parent Phillips 66 (PSX). With a well-known dropdown schedule and strong parent, their ability to raise capital has never really been in question. It’s not just large caps though. Western Refining Logistics (WNRL) has a market cap of roughly $1.1 billion but also raised about $80 million in equity to fund a dropdown from their parent, Western Refining (WNR).
Equity isn’t the only thing coming up roses. Two MLPs issued debt in May. Boardwalk Pipeline Partners (BWP), an investment grade MLP, issued $550 million of 10-year notes at 5.95%. We’ve mentioned before that throughout this downturn, debt markets have remained open to investment grade names. However, Ba2-rated Tesoro Logistics (TLLP) also priced $700 million of notes. The five- and eight-year notes have rates of 6.125% and 6.375%, respectively.
At the beginning of the year, MLP access to capital was one of the largest fears of investors, and indeed one of the biggest risks to the space in 2016. Without funds, they would simply be unable to pursue future growth. The opening of the capital markets, whether through PIPEs, ATMs, preferreds, or debt are the rain MLPs will need to grow through the recovery.
Jack Frost came and some lost
Of course, not everyone survived the winter. The companies closest to the wellhead have always had the largest exposure to the downturn in commodity prices, and the Hydrocarbon Production companies are the wellhead itself. Alongside their numerous corporation counterparts, two of these upstream MLPs finally were also unable to pay their creditors. LINN Energy (LINEQ) (and the sister shares trading as LNCOQ), decided in May to file for Chapter 11 bankruptcy. A few days later, Breitburn Energy Partners (BBEPQ) also filed for Chapter 11. Now, Chapter 11 is designed to maintain the business as a going concern (Chapter 7 is liquidation), so both companies will continue to operate and to trade, albeit on the pink sheets.
At the beginning of the year, so many investors were asking when the other shoe would drop, and this shake out, despite its disconnect from midstream, may be just the bit of spring cleaning the MLP space needed to make room for future growth. Without worrying about potential bankruptcies, investors can now turn their attention to what may be coming next.
This space hasn’t seen an IPO since CNX Coal Resources (CNXC) went public on July 1, 2015. There have only been two calendar years without an MLP IPO in the past two decades: 1997 and 2009. There are over a dozen MLPs that have filed an S-1 with the SEC, but most of these are not midstream MLPs. Given the difficulty upstream and commodity sensitive businesses have had in the past two years, we may need to wait even longer to see the IPO garden begin to bloom.
Tempting baubles soon bring squabbles
With so many people convinced that the bottom is behind us, many wish to finish or cancel the deals they started when prices were (are) low.
We’ve spoken before in this space about the mergers we’ve seen, and there is enough continuous news that I could provide an ongoing update each month about the soap opera that is the Energy Transfer Equity (ETE) and the Williams Companies (WMB) merger. Lawsuits, counterclaims, and more lawsuits have been filed. News fatigue is beginning to settle in, much like it did over the (un)approval of Keystone XL, which played out over many years. Bickering aside, WMB unitholders vote on June 27th, so within a month (with luck) investors will have clarity and can begin to value the companies either separately or together. Regardless of how it ends, once it has finished, the removal of the uncertainty is likely to reduce volatility, which may in turn clarify valuations. (As we’ve begun repeating here at Alerian, “Uncertainty is the enemy of premium valuations.”)
Back in February, Dominion Resources (D) and Questar (STR) announced a merger expected to close at the end of the year. Of course, there are always lawsuits. In this case, STR settled “solely to avoid the costs, risks, and uncertainties inherent in litigation, and without admitting any liability or wrongdoing”. The quiet closure of this merger will add significant assets that may be dropped down into D’s MLP, Dominion Midstream Partners (DM). The less the companies pay in lawyer fees, the more that is available to run and expand their businesses.
Is this the tide coming in?
If the entire asset class is recovering and the ones who weren’t going to survive have now been mourned, we may indeed be watching the rising tide that lifts all boats. If that is the case, then it may not matter much whether a company is paying millions in legal fees, or an extra percentage point on the debt. Sure, there will always be one plant that bears the most fruit and one with a slightly smaller yield, but in a good growing season, all gardens are plentiful.
2016.06.06 10:00am CST – Edited to update WNRL link and provide clarity on the pricing of TLLP notes, the opening of capital markets, and the MLP market bottom.