Corporate Solutions

At Morgan Stanley’s midstream conference in early March, several MLP management teams discussed the prospects of converting underutilized gas pipelines that earn low tariff rates into oil pipelines.  For example, Energy Transfer Equity LP discussed the possibility of converting the Panhandle interstate natural gas pipelines (which it will acquire via the merger with Southern Union in mid to late March) to crude oil service.  Though still in a nascent stage, the natural gas to oil pipeline conversion will likely become an emerging trend as it reflects infrastructure reconfiguration to accommodate new sources of crude oil and the changing landscape of the refining markets (such as refinery closures in the Northeast).   

For the full article, please email Tamar Essner at Tamar.Essner@thomsonreuters.com

Master limited partnerships (MLPs) outperformed equity and credit benchmarks in April, with the Alerian eking out a gain of 1.68% while the S&P 500 fell 0.7%.  MLPs involved in natural gas storage and coal led the group with near double digit gains after having been the chief laggards of all the MLP subsectors for the past several months.  Propane MLPs, another recent underperforming sub-industry, also rebounded on support from Suburban Propane Partners LP’s proposed acquisition of Inergy LP’s retail propane business for $1.8 billion.  In other deal news, Penn Virginia Resource Partners LP’s announced acquisition of Chief Gathering LLC’s midstream assets for $1.0 billion was the latest example of consolidation focused around the Marcellus shale.    

The largest of the recent MLP deals was Energy Transfer Partners LP’s (ETP) agreement to purchase Sunoco, Inc. (SUN), in a cash and units transaction valued at $50.13 per share, reflecting a 29% premium to SUN’s 20-day average price.  ETP’s acquisition of SUN, which is not an MLP, comes on the heels of Energy Transfer Equity’s (ETE) purchase of Southern Union and Kinder Morgan’s planned purchase of El Paso Corp, reflecting a trend of large MLPs acquiring c-corporations.   

For the full article, please contact Tamar Essner at Tamar.Essner@thomsonreuters.com

While the 13-F filing data that shows institutional investment managers’ Q1’2012 capital allocations has not yet been submitted to the SEC, filings from previous quarters reveal a consistent trend.  Money from all sectors is leaving the investment discretion of traditional equity managers, such as mutual funds, and rotating into sector-focused ETFs, bond funds, private equity and hedge funds.  Q4’2011 13-F data from the top 100 actively managed investors, as measured by their equity assets under management, indicated that these investors decreased their dollar value exposure to every single macro sector even as this quarter witnessed an 11% rise in the S&P 500.  During this period, energy experienced one of the steepest capital outflows of nearly $50 billion from the top tier of institutional investors. 

However, within oil and gas, one area that has seen increased investor appetite is the downstream operators, mirroring this subsector’s vast outperformance in the stock market.  The S&P 500 Oil & Gas Refining & Marketing Index surged more than 23% in Q1’2011, doubling the next-best faring sub-industry index, the Philadelphia Oil Service sector index, which surged 10% (and its counterpart, the S&P 500 Oil & Gas Equipment & Services index, only gained 2%).  Meanwhile, the S&P 500 E&P index rose 6% despite the fact that Brent oil climbed more than +$17/bbl, or 14%, in the first quarter.  Upstream-focused equities have underperformed Brent since early 2011 and analysts estimate that these stocks are pricing about $100/bbl crude oil, well below the current Brent price.  By contrast, refiners have outperformed even as the planned reversal of the Seaway crude oil pipeline and weaker U.S. gasoline demand have compressed differentials. 

For the full article, please email Tamar Essner at Tamar.Essner@thomsonreuters.com

Following the gains of the first quarter, the first half of the second quarter has been, so far, marked by losses across the board.  The sell-off was ignited by the early April release of the minutes of the Federal Reserve’s March meeting, which showed that policymakers’ appetite for another round of quantitative easing significantly decreased from the prior meeting.   Amid improving economic and employment data, investors, too, appeared to shift their outlook regarding interest rates.  On 3/14/12, even before the central bank’s meeting minutes were released, the yield on the ten-year treasury increased 16 basis points to 2.27% from 2.11%, sending the prices of bonds and other yield securities, including MLPs, lower.  While the absolute yield level is still low, this move was interpreted as an indication of expectations for increases in future interest rates.   

For the full article, please email Tamar Essner at Tamar.Essner@thomsonreuters.com

On the first Friday of the month, the government released its monthly jobs report which economists called “unquestionably positive” and “game changing.”  The data showed that the unemployment rate booked its fifth consecutive monthly decline, falling to 8.3% from December’s 8.5%, as employers added 243,000 jobs in wide-ranging areas including manufacturing, construction, trade and transportation services, business services, leisure and hospitality.  The S&P 500 rallied 1% while the Alerian fell 0.3% on this news.

So, the big question for the capital markets now is, has the U.S. economy truly turned a corner, or is the blowout employment number an aberration similar to the temporary drops in the jobless rate that we experienced about a year ago?  Critically for MLPs, if the employment situation continues to materially improve, the likelihood of interest rates staying at zero through the end of 2014 will diminish.  This would undoubtedly make MLPs less attractive relative to other yield-driven securities, especially as MLPs approach fair value.  Moreover, MLPs rely upon favorable access to the credit and debt markets which could be adversely impacted if rates rise.

However, whereas historically, investments in MLPs were driven primarily by appetite for yield, the market is now also focused on secular growth trends. Investors today are willing to pay bigger premiums for MLPs that have greater distribution growth rates than for the MLPs that currently have the highest yields.  The preferred sources of distribution growth are not third party acquisitions or higher fee-based contracts, but organic build-outs and drop-downs.  For the former, investors are looking for MLPs that are well situated to invest in new infrastructure to serve liquids-yielding shale resources, particularly in the Marcellus, Bakken, Eagle Ford and Permian Basin.  For the latter, the market is focused on MLPs with the ability to purchase assets from an E&P sponsor at attractive valuations which could support distribution growth.

Investors have poured capital into selected MLPs with footprints in the right resources and with asset drop-down capacity, leaving those partnerships trading at compressed yields as the underlying unit prices were bid higher.  The market has focused instead on low price/discounted cash flow multiples and compelling deferred-year yields that are implied by strong growth outlooks from the shale oil and natural gas liquids resources.

While smaller partnerships have been able to grow their distributions at faster rates, the market places a premium on mature companies that can use their size to execute projects more efficiently.  For example, while Enterprise Products Partners is the largest MLP, it has had an outsized 15% run-up over the past 52 weeks despite a 5% distribution growth rate, as compared to an 8% distribution growth rate in smaller partnerships.  Two of Enterprise’s biggest projects now involve the use of existing assets to provide leverage (ethane pipeline from the Marcellus to the Gulf Coast and the reversal of the Seaway pipeline).

For the full article, please email Tamar Essner at tamar.essner@thomsonreuters.com

Unfortunately, U.S. drivers have not seen much benefit at the pump from inland crude oversupply because refiners on the Gulf Coast ship much of their output to emerging economies in South America where demand is stronger and access is easier.  According to data released by the U.S. Energy Information Administration in the last week of November, 2011 marks the first year that the U.S. is a net exporter of petroleum products since 1949.  This raises larger questions about the domestic energy infrastructure system, not only for crude oil, but for transporting refined products within the continental U.S. as well.  However, as the U.S. remains the world’s biggest net importer of crude oil, it is still a long way from energy independence.   

To read full article, please contact me at tamar.essner@thomsonreuters.com

Late on Sunday, October 16th, Kinder Morgan Inc (KMI) announced the purchase of El Paso Corp (EP) for $37.8 Billion.  This acquisition will make KMI the fourth largest energy company in North America and the continent’s largest operator of natural gas pipelines.  Merger Monday was in full force as the very next day Norwegian state-controlled Statoil (STO) announced plans to buy U.S. onshore crude oil and natural gas producer Brigham Exploration (BEXP) for $4.7 Billion.  Speculation about the implications of these two significant transactions overshadowed the announcement of another relatively smaller transaction in the natural gas market, made on Thursday of that same week.  Mid-cap onshore producer Quicksilver Resources (KWK) said that it would establish a master limited partnership (MLP) comprised of 18% of its current Barnett natural gas production and 15% of its proven reserves in that resource with targeted proceeds in excess of $400 million.  Although the three deals are very different in nature and experienced varying market reactions, taken together, they highlight several tradable themes in the energy space.  Broadly speaking, they underscore opportunities for expansion of the MLP market and help de-risk new upstream activity in natural gas liquids and shale oil. 

To read the full article, please contact me at tamar.essner@thomsonreuters.com