MLP Market Overview1

MLPs,as measured by the Alerian MLP Index (AMZ), ended February down 0.7% on a price basis and up 0.4% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 4.0% total return for the month. The best performing MLP subsector for February was the Gathering and Processing group, while the Propane names generated the weakest returns, on average.

For the year through February, the AMZ is up 5.4% on a price basis, resulting in a 5.5% gain on a total return basis. This compares to the S&P 500 Index’s 5.6% and 5.9% price and total returns, respectively. The Gathering and Processing group has produced the best average total return year-to-date, while the Propane subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by nine basis points (bps) over the month, exiting the period at 447 bps. This compares to a trailing five-year average spread of 420 bps and the average spread since 2000 of approximately 354 bps. The AMZ indicated distribution yield at month-end was 6.9%.

Midstream MLPs and affiliates raised $2.3 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $6.0 billion of marketed debt during the month. MLPs and affiliates announced approximately $0.1 billion of asset acquisitions during February.

Spot West Texas Intermediate (WTI) crude oil exited the month at $54.01 per barrel, up 2.3% over the period and 60.0% higher year-over-year. Spot natural gas prices ended February at $2.52 per million British thermal units (MMbtu), down 16.3% over the month and 55.6% higher than February 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $26.91 per barrel, 12.5% lower than the end of January and 57.2% higher than the year-ago period.

News

FERC Approvals. Three large natural gas pipeline projects, representing a collective $7.5 billion of growth capital spending, received Federal Energy Regulatory Commission (FERC) approval in early February. Energy Transfer Partners (NYSE: ETP) was granted conditional approval for the Rover Pipeline, Williams Partners (NYSE: WPZ) received a certificate for its Atlantic Sunrise expansion project, and National Fuel Gas (NYSE: NFG) was granted construction approval for the Northern Access project. Following the recent resignation of a FERC commissioner, the commission now lacks a quorum to vote on project approvals until at least one new commissioner can be nominated and confirmed.

New Projects Moving Forward. Numerous new midstream infrastructure projects were recently greenlit. A few notable announcements include:

  • Enterprise Products Partners (NYSE: EPD) formally moved forward with the Midland to Sealy pipeline expansion and accelerated the planned in-service date. EPD also announced plans to construct a new isobutane dehydrogenation unit (a facility that converts a natural gas liquid, isobutane, into isobutylene to be used as a feedstock to manufacture lubricants, rubber products and gasoline additives) in Mont Belvieu, Texas.
  • Energy Transfer Partners (NYSE: ETP) announced plans to build a fifth fractionator (a facility that separates natural gas liquids into their individual components: ethane, propane, butane, isobutane, and natural gasoline) at Mont Belvieu, Texas.
  • Sunoco Logistics Partners (NYSE: SXL) will proceed with an expansion of its Mariner East 2 system.
  • Tallgrass Energy Partners (NYSE: TEP) announced plans to build facilities to connect the Pony Express Pipeline to HollyFrontier’s (NYSE: HFC) refinery complex in El Dorado, Kansas.
  • Western Gas Partners (NYSE: WES) announced plans to construct two new natural gas processing plants in the Delaware basin.

Fourth-Quarter Reporting Season Continues. Fourth-quarter reporting season continued in February. Through month-end, 77 midstream entities had announced distributions for the quarter, including 46 distribution increases and 31 distributions that were unchanged from the third quarter. Through the end of February, 65 sector participants had reported fourth-quarter financial results. Operating performance has been, on average, better than consensus expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 2.4% better that consensus estimates and 7.2% higher than the third quarter of 2016.

Thought of the Month

Energy market observers and, in particular, those who follow the Energy Transfer family of partnerships (ETE, ETP, SXL, SUN), will recall that throughout the past couple of years the Energy Transfer family has seemed to face one headwind after another. The Williams acquisition debacle and the politicization of the Dakota Access Pipeline regulatory process received particularly broad attention. However, close observers will also note that the Energy Transfer family has quietly achieved numerous successes in recent months.

For this Thought of the Month, we thought it would be interesting to review these achievements since the magnitude of these efforts can be lost when simply reported in isolation. To summarize:

  • On November 9, 2016, SXL announced a strategic crude oil joint venture with ExxonMobil in the Permian Basin. Concurrent with the transaction, ExxonMobil agreed to enter into a preferred provider agreement with the joint venture. SXL will be the majority owner and operator of the joint venture’s assets.
  • On November 11, 2016, SXL announced its intention to acquire ETP to strengthen the combined balance sheet, increase the scale and diversification of the partnerships, and provide opportunities to more closely integrate the SXL and ETP asset footprints. The transaction is expected to close in April 2017.
  • On January 17, 2017, ExxonMobil announced a $6.6 billion acquisition of properties primarily focused in the Delaware Basin, greatly increasing its exposure to the Permian Basin and expected to enhance the value of the SXL joint venture.
  • On February 3, 2017, Energy Transfer announced the receipt of the FERC certificate for construction of the Rover pipeline. The Rover pipeline is a $4.2 billion project that will carry natural gas from the Marcellus/Utica west to Defiance, Ohio, then north to the Dawn Hub in Ontario. Receipt of the FERC certificate was critical to timely completion of tree clearing before a March 31 deadline. With receipt of the FERC certificate, Energy Transfer is confident that Rover will be in service to Defiance by July 2017 and to the Dawn Hub in November.
  • On February 8, 2017, Energy Transfer announced receipt of an easement from the Army Corps of Engineers that allowed Energy Transfer to move forward with completion of the Dakota Access pipeline. The Dakota Access pipeline will transport crude oil from the Bakken to Patoka, Illinois, with the option of moving the crude all the way to the Gulf Coast.
  • On February 15, 2017, ETP and SXL announced the completion of their sale of a 36.75% minority interest in the Dakota Access pipeline for cash proceeds of $1.2 billion to ETP and $800 million to SXL. Energy Transfer expects commercial operations of the pipeline to commence in the second quarter of 2017.
  • On February 22, 2017, SXL announced the receipt of additional shipper commitments for the Mariner East 2 project which resulted in an announced expansion project (ME 2X) that will increase NGL takeaway capacity from the Marcellus/ Utica to the Marcus Hook facility on the East Coast. This $2.5 billion project is expected to begin commercial operations in the third/fourth quarter of 2017.

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1 Source: Bloomberg, 2/28/17.