Master Limited Partnerships (MLPs) performed poorly last week, with the Alerian Index dropping 4.3%, bringing it to -7.7% YTD. The yield on the index is now around 6.4%, 4.3% above the ten year treasury which is historically an attractive level. There were a couple of unusual financing transactions undertaken by MLPs over the past week. One was the issuance by Kinder Morgan (KMI) of Euro-denominated debt. They issued €1.25BN divided between seven and twelve year maturities. KMI has no natural need for Euros since their business is all in North America, and because they don’t operate there one might think that European investors wouldn’t be that familiar with them as an issuer. Nonetheless, KMI was able to issue seven year debt at 1.50% and 12 years at 2.25%. These yields are lower than what they’d pay in the U.S., and while it’s tempting to suggest that the declining € was an additionally attractive feature (since if the € is weaker against the $ when the debt matures that will create a further gain for KMI), such transactions typically involve a currency hedge, since KMI’s business is about running pipelines not speculating on FX rates.
But even with the hedge, it likely represents attractive financing for KMI and reflects a positive view of their investment grade debt outside the U.S.
Another unusual piece of financing came from Targa Resources Corp, (TRGP). TRGP controls Targa Resources Partners LP (NGLS), and while equity is normally issued at the MLP level, in this case the C-corp which owns the General Partner (GP) and Incentive Distribution Rights (IDRs) for NGLS carried out a secondary. They raised $292 million which could increase to $336 million if the underwriters exercise their 30 day option to buy additional shares. In effect it increased the stock component of TRGP’s earlier purchase of Atlas Pipeline Partners and Atlas Energy which closed at the end of February. Pure-play GPs need never issue equity because they don’t have any assets to finance. However, TRGP is a C-corp that owns and controls physical assets in addition to NGLS’s IDRs. As a result of the additional equity, TRGP’s Debt/EBITDA will come down to a pretty conservative 2.9X since they’ll use the proceeds to pay down part of the revolver that helped finance the Atlas acquisition.
The other bit of news was that the IRS will once again begin issuing Private Letter Rulings (PLRs). A company contemplating dropping assets into an MLP structure can approach the IRS and request a specific ruling on whether the proposed transaction will qualify as an MLP. The IRS had stopped issuing these almost a year ago so it could review the law and come up with coherent regulations to guide its decisions. The resumption of MLP related PLRs will be welcomed by companies whose planned drop-down transactions had been on hold during this period of time. In our view the trend had previously been towards a somewhat more liberal interpretation of the types of assets eligible to be placed in an MLP structure. So far there’s been no indication from the IRS about the results of their 11 month internal deliberations, so we’ll find out as new transactions are made public.
We are invested in KMI and TRGP.
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.