What Happened in April – Everyone Is Getting Ready
For MLPs and energy infrastructure companies, April was spent getting ready. MLPs, as measured by the Alerian MLP Index (AMZ), finished the month up 11.0% on a total return basis, the first double digit positive month in several years. As capital markets ease, many MLPs are taking advantage and accessing quite a bit of capital. And yet, money won’t solve everything, as permitting problems, construction delays, and environmental protests continue. Other MLPs are preparing themselves by selling assets, updating their ownership structure, or cutting distributions (which the market perceives differently now). Everyone is getting ready, each in its own way.
The beginning of M&A and restructuring that we saw in March continued in April. Plains All American Pipeline (PAA) announced in one press release that it had sold $250 million in noncore assets in the first quarter, and expects another $250 million to be sold by the end of the second quarter. It’s also expanding its Canadian operations by buying NGL assets from Spectra Energy (SE).
Also getting rid of noncore assets (albeit of a different kind) was NGL Energy Partners (NGL), which sold its remaining LP units of Transmontaigne Partners (TLP) to ArcLight, which had previously bought its interest in TLP’s GP.
More traditionally, MLPs and their GPs continue to pursue the most advantageous arrangements. SunCoke Energy Partners (SXCP)’s GP deferred IDR payments for the next year. This is a deferral, but not a waiver. Azure Midstream Partners (AZUR)’s GP could not make the minimum volume commitment (MVC) payments, so in exchange for canceling those contracts, the GP surrendered common units, subordinated units, and IDRs. Memorial Production Partners (MEMP), having cut its distribution each of the past three quarters, announced that it was buying back its GP and IDRs for $0.75 million. While I use this as an example of simplification of structure, unitholders will now have the additional benefit of electing MEMP board members, starting at the 2017 annual meeting.
MLPs can pare down not only their assets and their structure, but also their obligations. This is, of course, just a euphemism for “cutting your distribution”. This has been happening every quarter it seems, but there seems to be a new template for doing so successfully. American Midstream (AMID) traded up 21.3% when it announced it cut its distribution 13%. There were attendant acquisition announcements, and, in the same press release, it announced $120 million in preferred equity from ArcLight. Clearly, the market supports these decisions. NGL did a similar thing, cutting the distribution nearly 40% and raising $200 million in preferred equity. Units traded up more than 24% on the announcement. The preferreds are expensive at a 10.75% yield, but still cheaper than the 27.2% yield NGL units had on the day before the announcement.
On the other side of the coin, Capital Products Partners (CPLP) has again cut its distribution, and again the market was surprised by the announcement, trading down 28.5% that day. I say “again” as in the first place, CPLP cut its distribution previously in 2010, and in the second place, because this is a different market cycle than in 2010. The market is less forgiving of twice offenders, and all the more so because CPLP raised its distribution throughout 2015, potentially implying that the necessity of this cut has taken management by surprise.
Selling assets and issuing preferred equity isn’t the only way to raise money, though. Enterprise Products Partners (EPD) (go ahead and click the link to see their redesigned website!), well known for its 1.3x coverage ratio, would not seem to need any more cash. However, in an 8-k filing, it announced that in the first quarter, it raised $1.6 billion under its at-the-market (ATM) equity issuance plan, distribution reinvestment plan (DRIP), and employee unit purchase plan. Additionally, it priced $1.3 billion of debt in early April. It is getting ready for the $4.2 billion of growth projects it expects to complete in 2017 and 2018.
Spectra Energy Partners (SEP) is also preparing for its $6 billion of expansion projects through 2019, although it raised the money a bit unusually. The parent, Spectra Energy (SE), sold $420 million of its own stock, the proceeds of which were used to then buy SEP units.
MPLX (MPLX) raised nearly $1 billion in convertible preferred units, Hi-Crush Partners (HCLP) raised over $40 million in an upsized offering, and there are the AMID and NGL deals mentioned above, among others. Capital markets may indeed be easing.
Money may be easier to come by, but what are MLPs to do with it? Yes, those who are raising capital doubtless have intended purposes for it, and most MLPs with high leverage are focused on reducing it. However, building a pipeline does not seem quite as simple as it used to be. Fewer infrastructure assets will be needed, for starters.
Energy Transfer Partners (ETP) finds its Dakota Access pipeline protested on environmental grounds. The Constitution Pipeline, owned in part by Williams Partners (WPZ), was denied a water-quality certificate by the state of New York. Without this, construction cannot begin, however, the owners remain committed to the project. Kinder Morgan (KMI)’s Northeast Direct pipeline project, also environmentally controversial, has been cancelled due to an inability to sign enough customers. The same press release mentions that the Palmetto Pipeline in Georgia has also been removed from KMI’s slate of projects due to eminent domain and permitting concerns. These cancelations and delays (among others) have no common cause, and yet, taken as a whole may show that the barrier to MLP organic growth may be more than just access to capital.
Preparing to construct a pipeline may now involve more (and more involved) environmental studies and regulatory successes than in the past.
Ready for What?
Each company is getting ready in its own way. Perhaps that’s just to survive in the current environment, and hopefully it’s to be well-positioned when the cycle turns. We hear James Carreker of US Capital Advisors has pledged not to cut his hair until the AMZ reaches 300 again, and we imagine his coworkers are more than ready for that!
2016.05.06 7:55pm CST – Edited to correct the spelling of Azure Midstream Partners.
2016.05.09 12:20pm CST – Edited to correct the next-day return for NGL.
2016.05.09 4:00pm CST – Edited to correct the ticker for Memorial Production Partners.