Monthly Master Limited Partnership Overview

Transcription

U.S. Research
Published by Raymond James & Associates
Energy
September 20, 2013
Industry Brief
Darren Horowitz, (713) 278-5269, [email protected]
Kevin Smith, (713) 278-5278, [email protected]
Cory J. Garcia, (713) 278-5240, [email protected]
Edward Rowe, Sr. Res. Assoc., (713) 278-5294, [email protected]
Midstream Suppliers: Industry Overview __________________________________________________________________________
Monthly Master Limited Partnership Overview - August 2013
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Performance overview: MLPs track broad equities for August. The Alerian MLP Index’s (AMZ) closing high for the month came early: after
closing up 0.6% to 454.23 on the first trading session of August, the index proceeded to steadily trend down throughout the rest of the month
to finish at 437.13, for a loss of 3.2%. Relatively, this isn’t all that bad as the index was in line with equities (S&P 500 -3.1%). The AMZ also
significantly outperformed other yield-oriented investments such as REITS (-7.0%) and Utilities (XLU Index -5.0%). While all income-oriented
investments faced the same headwind of rising interest rates, MLPs benefited from the rise in natural gas liquid (NGL) prices during the
month, specifically the heavier end of the barrels components that are highly correlated to crude prices. However, the AMZ underperformed
relative to its energy counterparts, as the OSX and EPX were -2.1% and +1.5%, respectively, with the latter benefitting from the run-up in
crude prices due to fears of Middle East supply disruptions. All-in, MLP performance in August was mixed but certainly favorable compared to
July’s relative underperformance across the board. Year to date, the AMZ’s performance of +13.5% has outperformed other yield-oriented
securities with REITs/Utilities/10-year Treasurys posting returns of -2.0%/+6.8%/-5.3%, respectively. However, all three are underperforming
the S&P 500 YTD (+14.5%) as the strengthening economy increases the likelihood that the Fed will “taper” off its bond purchase program. This
has raised the 10-year Treasury yield 102 basis points over the first eight months of 2013 to finish August at 2.78%, to the detriment of yieldoriented securities.
Monthly spotlight: Northeast gas processing and NGL infrastructure dynamics. As one of the most economic shale plays in the country, the
growth in gas and liquids within the Marcellus continues to accelerate facilitated by billions of dollars spent on additional midstream
infrastructure. Meanwhile, with the emerging Utica shale, Northeast gas and NGL production could provide significant upside to total U.S. gas
and NGL supply and could lead to several more billions of dollars spent within the region. With current projections for the Marcellus and
potential production out of the Utica, the long-term impact of these plays begs the questions: do we have enough Northeast infrastructure
and how will this impact the gas and NGL market? Given the increased competition to bring NGLs down to the Gulf, we believe that there is
ultimately the need for only one Y-grade pipeline from the region and we could ultimately see one of the recently announced projects fall
through as producers continue to weigh their options to achieve the highest netback. While these solutions are expected to be online
sometime near the end of 2015, we could see increased NGL pricing volatility within the region as storage could reach full capacity. Suffice it
to say, the NGL market will continue to evolve with the growing production out of the Marcellus and Utica, but ultimately we believe these
NGLs will make its way down to the Gulf Coast proving to be the best outlet for Northeast production, especially during the summer months.
NGL update: Crude rebound leads to higher NGL prices and improved frac spreads; we estimate ethane rejection of 200-250 Mbpd. The
composite NGL barrel posted a gain of ~13% for the month, ending at $0.94/gallon ($39.69/bbl) on the back of higher crude prices. Meanwhile,
operating rates by petchem producers ticked lower for the month to ~89-90% operating capacity. Ethylene crackers consumed 930-950 Mbpd
of ethane while propane consumption decreased to 445-460 Mbpd as propane prices significantly rebounded during the month. With natural
gas prices declining ~11%, frac spreads ended the month up ~24% at $7.39/MMbtu. Cracker downtimes have exacerbated ethane inventories,
leading to 200-250 Mbpd of ethane rejection. For the month of August, ethylene producers experienced compression in terms of propane
ethylene margins yielding $0.32/lb., down ~26% compared to ethane which ended the month essentially flat at $0.47/lb. We believe that
ethylene margins should remain relatively robust going forward on subdued ethane prices; however, with the rise in propane prices, we could
see ethane consumption reach +1,000 Mbpd and combined with ethane rejection inventories could finally start to trend downward.
Valuation: No near term catalysts on the horizon, rich yields/multiples, and equity issuance on tap keep us on the sidelines. With the
pullback in the AMZ continuing for the month of August, valuations have improved, but the space continues to trade at premium valuations
(based on historical trends). Meanwhile, we continue to struggle finding catalysts to drive further upside within the space and believe that
investors should continue to exercise selectivity when adding long positions and assess the risk profile of their portfolio (i.e., taking some
profits from names especially within the crude/liquids subsector). With that said, we maintain our secular bullish thesis within the space as
we believe midstream capex should remain robust for the next few years. Overall, we continue to overweight partnerships with 1) fee-based
cash flows, 2) solid hedging profiles, and 3) strong balance sheets to provide the best opportunities to weather any possible pullback experienced
within the space. The partnerships that exemplify such characteristics are Strong Buy-rated Enterprise Products Partners (EPD), Outperformrated Targa Resources Corp (TRGP), Plains All American Pipeline L.P. (PAA), Magellan Midstream Partners (MMP), and Genesis Energy LP (GEL).
Among E&P MLPs, we highlight Strong Buy-rated Memorial Production Partners (MEMP) and Outperform-rated Mid-Con Energy Partners (MCEP).
Please read domestic and foreign disclosure/risk information beginning on page 39 and Analyst Certification on page 39.
© 2013 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
Raymond James
U.S. Research
Table of Contents
Monthly Spotlight .............................................................................................................. 3
Summary of Changes in Ratings ......................................................................................... 6
August Performance Overview .......................................................................................... 6
Current Yield vs. Distribution Growth Expectations........................................................... 9
Comparable Analysis
AMZ vs. Yield-Based Equity Comps ............................................................................. 10
AMZ vs. Energy Indices/Commodities ......................................................................... 10
Valuation
MLP Valuations ............................................................................................................ 11
AMZ vs. Debt Instruments ........................................................................................... 13
AMZ vs. 10-Year Treasury ............................................................................................ 13
Debt and Equity Capital Markets ..................................................................................... 15
Acquisition Activity........................................................................................................... 18
The Equity Income Report ................................................................................................ 20
NGL Performance Review/Outlook .................................................................................. 21
Crude Oil Supply and Logistics Update............................................................................. 26
Our Favorite Names ......................................................................................................... 35
Valuation Comp Table ...................................................................................................... 36
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Raymond James
U.S. Research
Monthly Spotlight
Northeast Gas Processing and NGL Infrastructure Dynamics
How much could the Utica Shale add to Northeast production? The Marcellus shale is the one of the most economic shale plays in
the country and even with prices trending near the $3.00/MMbtu level, production continues to climb. With the shift to pad drilling,
production continues to accelerate, resulting in huge supply growth in the Northeast and these numbers could be even higher if
infrastructure constraints were not choking back production. Now with gas prices rebounding closer to the $3.50-3.75/Mcf level,
internal rates of return (IRRs) have improved for producers, which should keep production elevated for the rest of 2013 and into
2014. For some perspective on the amount of latent supply locked within the play, we estimate there are ~800-900 uncompleted
wells within the play and combined with upcoming pipeline and processing infrastructure, the growth in gas and liquids should
accelerate at an even faster pace. Meanwhile, our current projections do not take into account the emerging Utica shale play, and
based on initial figures, there could be significant upside to our projections. Midstream companies and producers alike have
increased their focus on the Utica and we anticipate billions of dollars will be spent within the region. With our current projections
for the Marcellus and potential production out of the Utica, the long-term impact of these plays begs the question, do we have
enough Northeast infrastructure or not enough? In this month’s spotlight, we touch upon the 1) potential growth in Marcellus/Utica
wet gas production and NGL production, 2) infrastructure surrounding these plays, and 3) potential ramifications to the market.
Marcellus /Utica Gas Processing Infrastructure Capacity
Marcellus /Utica NGL Production*
600
9,000
8,000
500
Gas processing capacity (Mbpd)
Gas processing capacity (MMcf/d)
7,000
6,000
5,000
4,000
Utica Wet Gas
Production
3,000
400
Utica NGL
Production
300
200
2,000
Marcellus NGL
Production
100
Marcellus Wet Gas
Production
1,000
0
1Q12
3Q12
1Q13E
3Q13E
Marcellus Wet Gas Production
1Q14E
3Q14E
Utica Wet Gas Production
Source: HPDI; Raymond James research.
1Q15E
3Q15E
1Q16E
3Q16E
0
1Q12
3Q12
1Q13E
3Q13E
1Q14E
3Q14E
Marcellus NGL Production
Gas Processing Capacity
1Q15E
3Q15E
1Q16E
3Q16E
Utica NGL Production
*Assuming full NGL extraction.
Source: HPDI, EIA, and Raymond James research.
How much NGL supply will come from the Marcellus and Utica? As you can see in the chart above (left), based on purely Marcellus
wet gas production, it appears that there is a sufficient amount of gas processing capacity for the region. (Of note, we are purely
focusing on wet gas production; a significant amount of gas processing capacity will also be allocated to dry gas production.) While
there is still not enough data to perfectly project wet gas production for the Utica, initial estimates range between ~1.0-2.0 Bcf/d of
additional wet gas production by 2016/2017. Based on initial rates released by various companies, we estimate that the Utica
production profile is somewhat similar to the Marcellus, given it sits underneath the Marcellus; thus, we estimate that ~1-2 Bcf/d of
additional wet gas production is reasonable. When combining the production profiles of the Marcellus and Utica and overlaying the
number of announced gas processing projects that will arrive online this year and in 2014, the Northeast could experience a
significant acceleration in gas and NGL production. In terms of NGL production (above right chart), the gallons per Mcf (GPM)
content for the Marcellus/Utica ranges between 4 and 9 and if we assume a conservative GPM content of 4.75-5.25, total NGL
production for the Marcellus could reach ~275-350 Mbpd by 2016. If we include the initial estimates/ranges for wet gas production
out of the Utica, this could add ~150-275 Mbpd of additional NGL production, or a total of 425-625 Mbpd of total NGL production; of
note, this assumes full NGL extraction (i.e., full ethane extraction). Suffice it to say, we estimate that Northeast NGL production is
set to accelerate at an even faster pace and could eventually trade at a discount to Mont Belvieu NGL pricing.
NGL takeaway competition gets even more interesting, but are midstream companies running the risk of overbuilding? Currently,
there are three pipelines that will ease ethane constraints within the region: 1) the 50 Mbpd ethane-propane Mariner West pipeline
to Sarnia (currently online), 2) the 190 Mbpd purity ethane Appalachia-to-Texas (ATEX) pipeline to the Gulf Coast, expandable to 250
Mbpd (currently conducting an open season for propane takeaway), and 3) the 65-70 Mbpd ethane-propane Mariner East pipeline
(online sometime 3Q14). If we assume that ethane is 45-50% of the NGL stream within both respective shale plays, this implies 200© 2013 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
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Raymond James
U.S. Research
300 Mbpd of ethane supply; however, we believe that 70-80% of ethane will be extracted, which implies NGL supply of 140-240
Mbpd of ethane supply due to ethane rejection. In sum, we estimate that there is sufficient ethane takeaway capacity for the region.
However, most recently two JVs were announced that could potentially bring 400-800 Mbpd of Y-grade takeaway capacity for the
region. Williams (WMB) and Boardwalk Partners (BWP) announced a JV to build a 200-400 Mbpd Y-grade line to the Gulf Coast
online sometime in late 2015, while Kinder Morgan (KMP), Markwest (MWE), and The Energy and Minerals Group (EMG) announced
a similar JV that will utilize Kinder’s Tennessee Gas Pipeline (TGP) for Y-grade NGL takeaway capacity (200 Mbpd expandable to 400
Mbpd through additional pumps and online late 2015).
Northeast NGL Takeaway Capacity
1000
900
800
Excess Takeaway Capacity
(in Mbpd)
700
600
500
Net Short Propane Supply
400
300
200
100
0
1Q12
3Q12
1Q13E
3Q13E
NGL Production
LPG Exports
Enterprise Rocky ATEX Express (ethane)
Williams/Boardwalk Blue Grass
1Q14E
3Q14E
1Q15E
3Q15E
1Q16E
3Q16E
Local Propane Demand
Markwest/SXL Mariner West (ethane)
Markwest/SXL Mariner East (ethane-propane)
Kinder Morgan/Markwest
Source: Company Data, RJ Research
Given this backdrop begs the question, are midstream companies running the risk of overbuilding in the Northeast? For some
perspective, a significant portion of Northeast production within the region will mostly likely be consumed indigenously (i.e., local
propane demand). Moreover during the winter months, propane consumption within the total PADD I ranges between 200-350
Mbpd, but falls to 100-150 Mbpd during the shoulder seasons; however keep in mind that PADD I also includes the Southeastern
portion of the U.S. We believe that the Northeast composes close to 40-60% of total PADD I propane demand, which corresponds to
approximately 100-200 Mbpd in the winter and 40-100 Mbpd during the summer (or average of 100 Mbpd per year for simplicity)
Thus, if both projects get built (assuming just the initial 200 Mbpd of capacity), we believe there will be more than enough takeaway
capacity for the region that could lead to underutilized pipes. In addition, with increased Y-grade competition to the Gulf Coast, tariff
rates could face additional competition and thus affect the IRRs on these respective projects. In sum, based on the number of
projects, we believe there could be excess takeaway capacity and that one of the two projects could fall through.
Gulf Coast the best outlet for the NGL market: LPG exports and netbacks to producers. For some perspective on the potential
netback to producers, assuming a composite NGL price of $0.90/gallon and deducting 1) the potential pipeline tariff of $0.13-0.15
per gallon from the Northeast down to the Gulf Coast and 2) fractionation fees of $0.03-0.04 per gallon, this equates to a producer
netback of $0.72/gallon or ~$30/bbl. As you can see in the chart on the following page (right), NGL prices within the region used to
trade at a premium to Mont Belvieu; however as Marcellus production has accelerated within the region, the premium pricing has
started to erode. With transportation and fractionation (T&F) fees of $0.16-0.18 per gallon, producers have to weigh the balance of
moving NGLs down to Mont Belvieu or finding other demand centers within the region. With that said, the only alternatives are 1)
moving ethane and propane to Sarnia and 2) moving liquefied petroleum gas (LPG) exports during the summer (i.e., Marcus Hook),
but these demand outlets remain well below the amount of production within the region. Meanwhile, with the potential to export
propane to Japan once the Panama Canal expansion is completed, we estimate the propane spread between U.S. and Japan should
provide producers and midstream companies an attractive incentive to export propane abroad. However, with the amount of Ygrade heading to Mont Belvieu, some people believe that NGL prices at Mont Belvieu could decrease even further. Thus, NGL prices
could experience a further decline as production within the Northeast accelerates.
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Raymond James
Mont Belvieu
Marcellus Producer Net Back
($/gallon)
NGL Prices
$0.90
Transportation
$0.14
Fractionation
$0.04
Net Back to Marcellus
$0.72
U.S. Research
($/bbl)
$37.80
$5.88
$1.68
$30.24
Source: RJ Research
Mont Belvieu - LPG Exports to Japan (propane)
Marcellus Producer Net Back
($/gallon)
($/bbl)
Japan
$1.67
$70.14
LPG Freight
$0.11
$4.62
LPG Terminal
$0.13
$5.46
Transportation
$0.14
$5.88
Fractionation
$0.04
$1.68
Storage
$0.02
$0.84
Net Back to Marcellus
$1.23
$51.66
Source: Raymond James research, Caiman Energy.
Source: RJ Research
Expansion of LPG export capacity in the Northeast: Could provide higher netbacks to producers. The only current export capacity
in the Northeast is Marcus Hook located in Philadelphia, Pennsylvania. We believe that Marcus Hook, which is currently undergoing
expansions, has the capability to export 65-75 Mbpd of propane. While this pales in comparison to LPG export capacity within the
Gulf Coast, there are four import terminals, 1) Providence, Rhode Island; 2) Newington, New Hampshire; 3) Chesapeake, Virginia;
and 4) Tampa Bay, Florida, which could potentially convert to an export terminal. While this could potentially be a solution, the cost
for conversion can run very high due to: 1) proper ethane-propane specifications, i.e., de-ethanizers, 2) refrigeration, and 3) docking
capabilities. Thus, during the shoulder season given the lack of takeaway capacity, producers will utilize the NGL pipelines as much
as possible to achieve the highest netbacks.
NGL storage demands premium pricing. With solutions around ethane under construction, the potential ethane problem has
squarely shifted to propane and butane. While the aforementioned Kinder JV and Williams JV could solve the propane and butane
problem, there is still a large need for NGL storage. For every barrel of propane consumed in the summer, ~2.5-3.0 barrels of
propane are consumed in the winter. One possible solution to address the extreme surplus situation in the Northeast is to increase
storage capacity. Based on the EIA’s latest data there is ~11.9 MMBbls of a total working NGL storage capacity. Keep in mind that
PADD I stretches down as far south as Florida. Industry sources suggest there is approximately 5-6 MMBbls of NGL storage in the
Northeast. However due to the seasonal demand profile for propane and butane, storage could reach full capacity and lead to price
blowouts for NGLs within the region. While the cost for organic growth expansions runs between $200-300 million, building NGL
storage faces steep regulatory hurdles. Companies positioned well to garner premium fees are Inergy L.P. and MarkWest Energy
Partners.
Conclusion: The NGL market remains very fluid and constantly evolving. The rise in NGL production could bring increased volatility
for the propane and butane market going forward; while LPG expansions will mitigate the oversupply situation at Mont Belvieu,
potential pricing disconnects could occur in the Northeast as production could exceed storage capacity. While it appears that the
Williams and/or Kinder Y-grade projects will provide enough takeaway capacity late 2015, there is the potential for price blowouts
due to lack of storage within the region for 2014/early 2015 (i.e., summertime). In sum, while there are many solutions to solving
the oversupply situation, the advantages and disadvantages of each solution could make or break a company. Suffice it to say, the
NGL market will continue to evolve, but we expect midstream and producers alike are becoming more cautious to avoid
overbuilding.
5
Raymond James
U.S. Research
Summary of Changes in Ratings
Martin Midstream Partners LP (MMLP) Upgraded to Outperform (August 15, 2013) following the announcement that Alinda Capital
will acquire a 49%/50% voting and economic interest in the general partner of Martin Midstream Partners. We believe cash flows at
Martin Midstream Partners could experience material growth via dropdowns, potential acquisitions, and other development
opportunities as Alinda Capital has a variety of assets that could potentially be dropped down to Martin Midstream Partners. With
that said, we believe the aforementioned drivers should help facilitate greater distribution growth, improve geographic and asset
diversity, enhance the fee-based composition of cash flow, and help de-risk the model. Thus, we raised our rating from Market
Perform to Outperform.
August Performance Overview
MLPs Track Broad Equities for August
The Alerian MLP Index’s (AMZ) closing high for the month came early: after closing up 0.6% to 454.23 on the first trading session of
August, the index proceeded to steadily trend down throughout the rest of the month to finish at 437.13, for a loss of 3.2%,
relatively in line with equities (S&P 500 -3.1%); however, the AMZ significantly outperformed other yield-oriented investments such
as REITS (-7.0%) and Utilities (XLU Index -5.0%). While all income-oriented investments faced the same headwind of rising interest
rates, MLPs benefited from the rise in NGL prices during the month, specifically the heavier end of the barrels components that are
highly correlated to crude prices. However, the AMZ underperformed relative to its energy counterparts, as the OSX and EPX
reported returns of -2.1% and +1.5%, respectively, with the latter benefitting from the run-up in crude prices due to fears of Middle
East supply disruptions. All-in, MLP performance in August was mixed but certainly favorable compared to July’s relative
underperformance across the board. Year to date, the AMZ’s performance of +13.5% has been a boon for MLP investors as the
index has significantly outperformed other yield-oriented securities, with REITs/Utilities/10-year Treasurys posting returns of
-2.0%/+6.8%/-5.3%, respectively. All three yield-oriented securities are underperforming the S&P 500 YTD (+14.5%) as the
strengthening economy increases the likelihood that the Federal Reserve will taper its bond purchase program. Speculation on the
timing of this tapering has raised interest rates; the 10-year Treasury yield has increased 102 basis points over the first eight months
of 2013 to finish August at 2.78%, with detrimental impact on other yield-oriented securities. The MLP benchmark is lagging other
energy indexes YTD, with the OSX and EPX returning +16.6% and +14.7%, respectively.
Thus far in 2013, the Diversified segment represented the strongest performing group, with an average return of 27%. The relative
outperformance is mainly attributable to GLP and MMLP, which are up 33% and 47%, respectively. GLP continues to benefit from
wide crude differentials, while MMLP has been rewarded for transforming the company through a number of acquisitions and
divestitures.
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Raymond James
U.S. Research
Average Price Return (%)
Average Yield (%)
Months
Year-to-Date
TTM
Months
Year-to-Date
TTM
August '13
12/31/12 - 8/30/13
8/30/12 - 8/30/13
August '13
12/31/12 - 8/30/13
8/30/12 - 8/30/13
MLP Subsector
Liquids Transport & Storage
Gas Transport & Storage
Gathering & Processing
Upstream
Propane
Tanker
Diversified
General Partners
-3.7%
-1.4%
-8.7%
-2.4%
-4.6%
-0.8%
-6.2%
-3.0%
19.9%
19.2%
15.9%
5.5%
23.5%
18.3%
26.8%
19.9%
23.6%
16.4%
5.9%
-4.3%
16.1%
9.9%
25.1%
27.6%
5.2%
6.4%
8.7%
9.8%
8.0%
7.5%
7.6%
4.4%
4.7%
6.4%
7.8%
9.3%
8.2%
7.6%
7.3%
4.8%
4.9%
6.7%
8.0%
9.1%
8.5%
7.9%
7.8%
5.2%
RJ Composites
RJ Strong Buy
RJ Outperform
RJ Priority List
-2.3%
-2.7%
-2.2%
16.1%
13.2%
10.9%
12.5%
13.2%
9.9%
8.9%
6.2%
6.2%
8.0%
6.0%
5.9%
7.8%
6.1%
6.0%
Benchmarks & Comparable Indices
Alerian MLP Index
S&P 500
Vanguard REIT ETF
SPDR Select Sector Utilities
10-Year Treasury Note
-3.2%
-3.1%
-7.0%
-5.0%
-3.1%
13.5%
14.5%
-2.0%
6.8%
-5.3%
10.1%
16.1%
-3.3%
2.6%
-7.3%
6.1%
2.1%
3.9%
4.0%
2.3%
6.0%
2.1%
3.7%
3.8%
2.0%
6.1%
2.2%
3.6%
3.9%
1.8%
Priced: 8/30/13 Source: Raymond James Research, Alerian, and Thomson
This analysis does not include transaction costs and tax considerations. If included, these costs would reduce an investor’s return. It should not be assumed that recommendations
made in the future will be profitable or will equal the performance of the securities in this list. A complete record of our MLP Priority List and stock recommendations for the trailing 12months is available upon request.
•
•
•
As detailed in the preceding table, our Strong Buy-rated (in August) names outperformed both the S&P 500 and the AMZ for the
month. The group finished down 2.3% in August.
Our Outperform-rated MLPs also posted relative outperformance in August, beating both the S&P 500 and the AMZ. The main
underperformers were Southcross Energy Partners (SXE) and EV Energy Partners (EVEP), which finished the month down 17%
and 13%, respectively. Regarding SXE, the partnership has underperformed as investors look for more clarity and visibility
around the partnership’s operating results and potential cash flow generation for the upcoming quarters.
The main benchmark index from which we gauge relative performance, the AMZ, finished down 3.2% for the month of August.
Examining outliers during the month of August, Pioneer Southwest Energy Partners (PSE) posted a strong return of ~13%. This solid
performance was partly due to a solid 2Q13 earnings release and partly due to the partnership continuing to trade on its parent
company’s fundamentals. The main laggard for the month was Eagle Rock Energy Partners (EROC), which declined 24% on lingering
concerns regarding the partnership’s sub-1x distribution coverage, high lever, and ultimately its ability to maintain the distribution.
RJ MLP Universe - August 2013 Price Returns
-25.0%
EVEP
SXE
EROC
-20.0%
-15.0%
NS
NSH
XTEX
NRGY
LINE
GLP
-10.0%
QRE
HEP
APU
DKL
SPH
CLMT
CPLP
MMLP
TRGP
MEMP
LGCY
MMP
KNOP
KMP
ETP
WPZ
BBEP
NGLS
GEL
XTXI
ACMP
AMZ
RGP
ETE
BWP
EPD
MCEP
PAA
SEP
-5.0%
TOO
TGP
GMLP
VNR
KMI
EPB
NKA
TLLP
LRE
OILT
0.0%
FGP
AMID
5.0%
PSE
PNG
10.0%
15.0%
Priced: 8/30/13 Source: Alerian, Thomson
7
Raymond James
U.S. Research
Examining outliers for year-to-date returns, Pioneer Southwest Energy Partners (PSE) is up ~80% as the partnership is closely
tracking PXD’s prices (which have done well in 2013 due to strong well results) due to the buyout offer.
RJ MLP Universe - 2013 YTD Price Returns
EVEP
EROC
LINE
-40.0%
SXE
BBEP
LRE
NSH
-20.0%
FGP
GEL
XTXI
ACMP
CPLP
SEP
GLP
NGLS
NKA
TRGP
DKL
XTEX
NRGY
OILT
MCEP
MMP
RGP
TLLP
TOO
BWP
ETP
EPD
PNG
SPH
KNOP
AMZ
MEMP
LGCY
EPB
PAA
TGP
APU
GMLP
HEP
KMI
VNR
KMP
WPZ
CLMT
QRE
NS
0.0%
20.0%
ETE
40.0%
PSE
AMID
MMLP
60.0%
80.0%
On a trailing twelve-month (TTM) basis, returns through August 30, 2013, Crosstex Energy (XTXI) represents one of the highest
appreciating partnerships with a return of ~57%. XTXI outperformance is attributable to positive outlook on the MLP’s growth
outlook and cash distribution growth via organic growth projects and dropdowns.
RJ MLP Universe - TTM Price Returns
LINE
EVEP
-45.0%
EROC
NSH
LRE
NS
-25.0%
APU
KMP
LGCY
VNR
WPZ
SXE
QRE
BBEP
-5.0%
XTEX
TLLP
NGLS
ETP
PNG
SPH
PAA
RGP
EPB
CPLP
KNOP
MEMP
FGP
AMID
TOO
NKA
EPD
BWP
AMZ
CLMT
KMI
MCEP
TGP
HEP
GMLP
15.0%
GLP
MMLP
NRGY
OILT
MMP
SEP
35.0%
ACMP
GEL
TRGP
DKL
ETE
PSE
XTXI
55.0%
8
Raymond James
U.S. Research
Current Yield vs. Distribution Growth Expectations
The following four charts detail a subsector snapshot of each partnership’s current yield vs. our forecasted three-year compound
annual growth rate in cash distribution/unit. Notably, the downward sloping trend line (populated by the aggregated data points)
exemplifies the thesis that the expectation for improved visibility in future distribution growth should correspond to a lower relative
current yield (all else being equal). That said, when searching for outliers vs. the trend that may reflect opportunities, one must be
cognizant that each equity has its own risk factors (i.e., balance sheet leverage/liquidity, asset location/composition, quality of cash
flow, and contract structure, etc.) that may disproportionately skew its current yield vs. other comparative MLPs.
Thus, when reviewing the following chart on the left and reconciling current yield with our forecast for long-term cash distribution
growth, we believe Targa Resources Partners (NGLS) and Access Midstream Partners (ACMP) possess inherent long-term cash flow
growth potential above what the market reflects and also have the financial/operational platform to achieve our forecasts with
lower associated risk. Given Targa’s positive outlook centered on the NGL environment, growth in gathering and processing
segment, and financial flexibility to pursue strategic growth initiatives, we believe that NGLS is well positioned to generate robust
distribution growth. Additionally, we believe Access is well positioned to benefit from increased production out of the Marcellus.
Within the propane sub-segment (following chart on the right), we believe the market is fairly reflecting risk vs. reward. Propane
partnerships continue to face headwinds, as sustainably higher wholesale propane costs impact margins, and volumes remain
challenged due to lackluster commercial/industrial demand, economic malaise, and lower weather-driven residential consumption.
Pipeline/Midstream Group Current Yield vs. Distribution Growth
12.00%
Propane Group Current Yield vs. Distribution Growth
12.00%
NS
11.00%
10.00%
ETP
8.00%
AMID
BWP
KMP WPZ
XTEX
SXE
6.00%
PNG
HEP
2.00%
0.00%
NGLS
EPB
EPD
4.00%
Current Yield
Current Yield
NKA
SEP
DKL
PAA
5.00%
MMP
GEL
ACMP OILT
9.00%
FGP
8.00%
SPH
APU
7.00%
TLLP
10.00%
10.00%
6.00%
0.00%
15.00%
1.00%
2.00%
3-Year Distribution CAGR
3.00%
4.00%
5.00%
6.00%
Priced: 9/17/13 Source: Raymond James Research, Thomson
As the final two charts detail, within the maritime and upstream groups, more delineated bifurcation by yield exists. Specifically,
those partnerships with less cash flow visibility driven by shorter-term contract durations and increased exposure to volatile spot
market trends tend to be trading at yield spread discounts (i.e., CPLP) vs. those partnerships with greater cash flow certainty and
improved visibility into above-average distribution growth (i.e., TOO, TGP, GMLP). Liquefied natural gas (LNG) demand continues to
be strong, especially in Japan and in Europe. With that said, rates have continued to increase, thereby creating a premium for LNG
carriers. On the upstream side, partnerships with a proven track record of achieving steady distribution with strong distribution
coverage ratios and a stable distribution growth outlook continue to trade at relative premiums (i.e., LGCY and VNR) compared to
the peer group. Meanwhile, names that have lower coverage ratios and more operational issues trade at slight discounts to the
peer group as the market judges the sustainability of their distribution. MCEP and MEMP also trade at a discount while the market
continues to underestimate the distribution growth potential.
Upstream Group Current Yield vs. Distribution Growth
Maritime Group Current Yield vs. Distribution Growth
14.00%
17.00%
Current Yield
Current Yield
12.00%
13.00%
11.00%
LRE
13.00%
15.00%
CPLP
9.00%
BBEP
QRE
LINE
10.00%
MEMP
9.00%
MCEP
VNR
8.00%
EVEP
LGCY
7.00%
7.00%
TGP TOO
5.00%
3.00%
0.00%
11.00%
2.00%
4.00%
6.00%
KNOP
GMLP
5.00%
8.00%
6.00%
10.00%
12.00%
4.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9
Raymond James
U.S. Research
Comparable Analysis
AMZ Ends Down 3% for Month of August; In Line With S&P 500, but Outperforms REITs and Utilities
The Alerian MLP Index (AMZ), which represents a diversified group of 50 partnerships using a float-adjusted market capitalization
method, was down 3.2% for the month of August, in line with the S&P 500 (loss of 3.1%), but well ahead of other yield-oriented
equities such as REITs (loss of 7.0%) and the XLU utility index (loss of 5.0%). The AMZ shot out of the gate in the first quarter of
2013, outperforming REITs by ~11%, S&P 500 by ~8%, and Utilities by ~6%. Therefore, it was not surprising to see a slowdown in
subsequent months, including slight pullbacks in May and July. The strong start to the year can be attributed to 1) subdued market
fears on the safety of the tax-advantaged status that currently benefits MLPs and other pass-through entities, 2) bullish sentiment in
the broader stock market on the back of a temporary resolution to the fiscal cliff gridlock in Washington, and 3) increasing
institutional funds and interest in the MLP sector. All of these factors have led to strong returns by MLPs year-to-date despite the
slowdown in recent months. Specifically, MLPs are up 13.5% YTD, outperforming REITs (-2.0%) and Utilities (+6.8%), but now
underperforming the S&P 500 (+14.5%). As a reminder, we forecast the AMZ to appreciate 5-8% on a price basis in 2013, and along
with 5-7% of distribution growth, provide total returns in the 10-15% range. As such, we would not be surprised to see a slight
pullback from current levels.
MLP Performance vs. REITS, Utilities, and S&P 500
2012 Daily Performance, Indexed
120%
MLP Performance vs. REITS, Utilities, and S&P 500
2013 Daily Performance, Indexed
125%
115%
S&P 500
120%
S&P 500
REITs
AMZ
110%
115%
Utilities
105%
110%
100%
AMZ
REITs
105%
Utilities
95%
100%
90%
95%
S&P 500
REITs
Utilities
AMZ
AMZ
Priced: 12/31/12 Source: Thomson, Alerian
S&P 500
REITs
Utilities
Priced: 8/31/13 Source: Thomson, Alerian
How Did the AMZ Stack Up vs. Other Energy Indices and Commodities in August?
WTI crude followed up on a strong month, up 2.5% on Middle East tensions, followed by natural gas prices which ended the month
up 3.2% as coal-to-gas switching helped soak up growing supply. Energy stocks posted mixed returns, with the EPX and OSX posting
returns of +1.5% and -2.1%, respectively, with the former due to rising oil prices. YTD, the AMZX continues to lead the pack with a
gain of 17%, followed by the OSX and EPX at 17% and 15%, respectively. After a poor 2012 for the energy sector, 2013 seems more
promising for energy stocks and commodities so far.
Alerian MLP Index vs. the OSX, S&P E&P Index and Commodities - Indexed 2012 Returns
Alerian MLP Index vs. the OSX, S&P E&P Index and Commodities - Indexed YTD
125
125
120
115
AMZX
Crude
OSX
Indexed to 100
105
AMZX
OSX
95
Crude
EPX
Natural
Gas
85
Indexed to 100
115
EPX
110
105
100
Natural
Gas
95
75
90
65
85
AMZX Total Return
Natural Gas
OSX
EPX
Crude Oil
OSX
Priced: 12/31/12
Source: Bloomberg, Alerian
Priced: 8/31/2013
AMZX Total Return
EPX
Crude Oil
Natural Gas
Source: Bloomberg, Alerian
10
Raymond James
U.S. Research
MLP Valuation
Valuations Still at a Premium Compared to Historical Trends, but Getting Shopping List Ready
For the month of August, the AMZ underperformed against other energy indices, and multiples continue to compress toward better
valuations. The majority of the underperformance is attributable to equity issuance during the month and rising interest rates (i.e.,
prospects of Fed tapering). While the slight underperformance improved valuations on a multiples perspective, our stance remains
the same in that we believe there will be a better entry point in adding significantly large positions to the space. With that said, the
pullback has put some names on our “radar,” but we still believe that crude marketing and crude by rail levered partnerships could
face some headwinds for the upcoming quarter. When looking at the space across most valuation metrics, multiples continue to
trade at slight premium valuations (based on historical trends). While we believe the long-term secular trend for MLPs will continue,
investors should assess the risk profile of their portfolio and possibly take some profits from names within the crude space. In
addition, in our view, investors should seek partnerships with 1) a strong hedging profile, 2) a strong balance sheet, 3) increased
flows toward fee-based margins, and 4) an attractive backlog of organic growth opportunities to increase DCF.
MLP Valuation Metrics (As measured by the AMZ)
Metric
Current
6.1%
12.8x
12.3x
11.2x
24.7x
Yield
Price-to-DCF
EV-to-EBITDA
Price-to-Cash Flow
Price-to-Earnings
Prior
Month
5.9%
13.7x
12.2x
11.9x
25.1x
5-Year
Median
6.6%
11.5x
11.2x
10.8x
21.0x
Valuation
% Premium/(Discount)
Premium
9.3%
Premium
11.5%
Premium
9.3%
Fairly Valued 3.4%
Premium
17.5%
Source: Bloomberg, FactSet, Raymond James Research
Based on an EV-to-EBITDA analysis, since the inception of the AMZ, our research shows that the historical trading range for
EV/EBITDA is ~10-13x. At the end of August, the index was trading at 12.3x, a slight premium compared to the five-year median.
The group traded down for the month and multiples started to trend down as well, but we still believe the group is trading at fair
value to a slight premium and would wait for a better entry point in adding more long positions to one’s portfolio.
Forward EV/EBITDA
Forward P/CF
16x
16x
14x
14x
12x
12x
10x
10x
8x
8x
6x
6x
4x
4x
Normalized Range
Priced: August 31, 2013 Source: FactSet, Raymond James Research
Forward EV/EBITDA
Normalized Range
Median
Forward Price-to-Cash Flow
Median
Priced: August 31, 2013 Source: Bloomberg, Raymond James Research
As shown in the above chart, looking at forward price/CF multiples as of August 31, 2013, current multiples of 11.2x suggest the
group is trading at a fair value to historical multiples. However, when examining forward P/E, the multiple suggests that the sector is
currently trading at ~25x, above the historical range of 16-24x. Furthermore, when evaluating the MLP-specific metric price-to-DCF,
the current valuation of 12.8x also implies that MLPs appear to be trading at a premium to historical medians.
11
Raymond James
U.S. Research
Forward PE
Forward Price-to-DCF FY1
27x
16x
25x
14x
23x
12x
21x
19x
10x
17x
8x
15x
6x
13x
11x
4x
9x
2x
7x
Normalized Range
Forward PE
Normalized Range
Median
P/DCF FY1
Median
Priced: August 31, 2013 Source: FactSet, Raymond James Research
Priced: August 31, 2013 Source: Bloomberg, Raymond James Research
To reconfirm our findings from analyzing multiples, we then followed the same process to see the normalized range for the spread
between the AMZ and Baa Corporates and found that the spread is trading within its historical range of 1 bp and 124 bp. As of
August 31, the AMZ was trading at a spread of 70 bp, in line with the historical average of 67 bp. This implies that Baa corporates
and the AMZ are trading in relative parity and the tightest spreads have been since the beginning of last year. While we believe that
further yield compression could occur as a result of further repricing of yields given the potential Fed tightening, we see no nearterm catalysts for further yield compression.
Alerian MLP Index Spread vs. Baa Corporate Bond Index
600
550
500
450
400
350
300
250
200
150
100
50
0
-50
-100
-150
Basis Points (bp)
Current Spread: +70 bp
Historical Average
Spread: +67 bp
'07
'08
'09
Normalized Range
'10
'11
Avg. Spread bp
'12
'13
Spread bp
Priced: 8/31/13 Source: Alerian, FactSet
Conclusion: Maintaining positive long-term outlook; near-term valuations imply that the sector is trading at a premium to
historical valuations. While we are maintaining our positive secular outlook for the overall MLP sector, which is supported by: (1) a
strong fundamental backdrop for energy infrastructure, (2) investors’ continued preference for yield-oriented securities, and (3)
continued positive fund flows into the sector. On a short-term basis, however, we believe that valuations are still rich compared to
historical trends and that investors should consider taking some profits especially within the crude sub-sector. In addition, investors
should remain selective on adding positions and target larger cap (i.e., lower beta) partnerships with 1) fee-based cash flows, 2) solid
hedging profiles, and 3) strong balance sheets will provide the best opportunities to weather any pullbacks experienced in
commodity prices.
12
Raymond James
U.S. Research
MLP Spreads Expand in the Month of August; Yield Spreads in Line With Historical Averages
For the month of August, the spread between AMZ and Baa Corporate Bonds expanded by 11 bp, beginning the month at 59 basis
points and then increasing by 11 basis points to 70 basis points. The driver behind this yield spread expansion in August was a
combination of lower Baa Corporate bond yields and higher AMZ yields. For reference, the AMZ’s current yield has retreated to
more normal levels compared to the prior month. For additional context, the historical spread between the AMZ and Baa is 67 bp,
and using this as a gauge for valuation is very meaningful in terms of evaluating risk and timing. From a risk and return perspective,
MLPs now do not provide as attractive a yield compared to other yield-oriented investments as they did previously. As detailed in
the following chart, the spread differentials have compressed since the beginning of the year due to the steepening of the yield
curve. This, however, has pushed yield spreads closer to historical averages and closer to fair valuation.
Alerian MLP Index Yield vs. Bond Yields
15%
14%
13%
12%
11%
10%
Yield %
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
AMZ
Baa Corporate Bonds
AA Corporate Bonds
10-Year Treasury
Muni Bonds
Priced: 8/31/13 Source: Alerian, FactSet
How Did the AMZ Stack Up vs. 10-year Treasury Yield?
Examining yields during the month of August, the spread of the AMZ to the 10-year Treasury decreased by 1 bp since the prior
month after dropping by 50 bp in June as investors continue to grapple over potential tighter monetary policy and long-term
prospects of the MLP sector. While the possibility of modifications to the MLP tax structure exists and further steepening of the yield
curve, the resilience of the MLP asset class is evident by the solid YTD performance (+14%) and overall yield compression (average
yields down 50 bp). During the month of August, the AMZ’s spread to the 10-year Treasury decreased from 3.29% to 3.28%, or 6 bp
above the historical average of 3.22%. While valuations are lofty given the low-yield environment, we believe investors will continue
to show preference for the tax-advantaged distributions and above-average distribution growth characteristics of the asset class
regardless of interest rates. Focusing on relative valuation vs. alternatives in today’s market, MLPs provide a compelling, low-risk
income stream and a total return profile that has historically outperformed the broader market on a risk-adjusted basis. Moreover,
we believe that MLPs will continue to outpace the broader markets over the long term. At the same time, we caution against an
extreme reliance on Treasury yield comparisons given the wide disparity between risk-free government bonds and equity-based
MLPs, which despite their yield-based nature still fall squarely within the risk spectrum of traditional equities.
13
Raymond James
14%
U.S. Research
Alerian MLP Index Growth & Spread to 10-Year Treasury Yield
1,800
Growth Stalls as
Broader Market Fears Mount
(August 2007 - March 2009)
Spread to 10-Yr. Treas.
1,600
12%
1,400
Average Spread
10%
Growth Accelerates
(2001 - August 2007)
8%
6%
1,000
8/31/13 Spread:
328 bps
The Early Years
(1996 - 2000)
Previous High Spread: 573 bps
12/13/1999
800
600
Alerian
Indexed to 100
Average Spread
to 10-Year Treasury
is 322 bps
4%
Alerian Total Return
Index
1,200
Alerian Total Return Index
400
200
2%
0
-200
0%
Priced: 8/31/13 Source: Alerian, Bloomberg
The AMZ’s yield spread to the 10-year Treasury ended 2012 at 483 bp, above the 417 bp spread in 2011. 2011 can be thought of as
the “Return of Volatility and Fear,” while 2012 was more the “Year of the Fed.” The European debt crisis, prospects of a slowing
global economy, and the downgrading of the U.S. credit rating led to a large amount of volatility, partially offset by several
pronouncements by the Fed to support the market over the medium term. With interest rates at very low levels, demand for U.S.
Treasurys remains very strong. Moreover, with 1) a lack of closure to the European debt crisis, 2) lackluster U.S. economic growth
underpinned by perniciously high unemployment, 3) post-election anxiety over the potential elimination of the tax-advantaged
status of MLPs, and 4) the re-emergence of the debt ceiling debate, yields on the 10-year Treasury continue to chart record lows.
Turning to the spread between the U.S. Treasury and the AMZ, the spread has averaged 321 bp since 1996 – providing a compelling
case that a reversion to a more normalized spread could manifest itself once the economy normalizes, especially if/when the Fed
begins to unwind interest rates.
Alerian MLP Index Yield vs. 10-Year Treasury
18.0%
Alerian MLP Index Yield
16.0%
10-Year Treasury Yield
Recessions Highlighted
March 2001 - November 2001
November 2007 - July 2009
14.0%
8/31/13: 328 bps
Yield
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Priced: 8/31/13 Source: Alerian, Bloomberg
14
Raymond James
U.S. Research
Debt and Equity Capital Markets
Close Date
1/11/13
1/7/13
1/9/13
1/9/13
1/15/13
1/30/13
1/30/13
1/31/13
1/31/13
2/5/13
2/12/13
2/20/13
2/21/13
2/27/13
3/1/13
3/1/13
3/5/13
3/5/13
3/6/13
3/15/13
3/15/13
3/18/13
3/18/13
3/18/13
3/18/13
3/18/13
3/20/13
3/25/13
3/26/13
3/27/13
3/31/13
4/1/13
4/2/13
4/4/13
4/4/13
4/10/13
4/12/13
4/15/13
4/16/13
4/22/13
5/7/13
5/9/13
5/10/13
5/17/13
5/14/13
5/14/13
5/16/13
5/22/13
5/28/13
5/29/13
5/30/13
6/4/13
6/10/13
6/15/13
6/30/13
6/30/13
6/30/13
7/1/13
8/6/13
8/13/13
MLP
CLMT
TLLP
XTEX
XTEX
USAC
GMLP
GMLP
VNR
HCLP
EPD
BBEP
BWP
KMP
EPB
XTEX
MCEP
WPZ
WPZ
MEMP
CPLP
EXLP
EROC
HEP
LRE
LRE
PNG
MEMP
CLMT
ACMP
EROC
NGLS
WPZ
SEP
ETP
ETP
KNOP
SXE
AMID
TOO
XTEX
TOO
ETP
XTEX
SPH
HCLP
WPZ
CLMT
TGP
PAA
VNR
BWP
APU
XTEX
SEP
TGP
KMP
GLP
NRGY
CPLP
ACMP
YTD (in millions):
2013 Equity Offerings
Gross Amount
Offering Type
Size of Deal Units
$182,907,500
Public Offering
5,000,000
$407,617,500
Public Offering
8,500,000
$130,668,750
Public Offering
7,500,000
$39,285,000
Private Placement
2,700,000
$198,000,000
Initial Public Offering
11,000,000
$115,986,000
Public Offering
3,900,000
$123,895,264
Private Placement
4,165,947
$256,220,000
Public Offering
8,000,000
$219,937,500
Private Placement
11,250,000
$501,952,000
Public Offering
8,000,000
$296,907,000
Public Offering
13,000,000
$500,000,000
Shelf
N/A
$397,210,000
Public Offering
4,000,000
$500,000,000
Shelf
N/A
$75,000,000
Shelf
N/A
$300,000,000
Shelf
N/A
$635,748,750
Public Offering
11,250,000
$142,980,000
Private Placement
3,000,000
$750,000,000
Shelf
N/A
$75,075,000
Private Placement
9,100,000
$500,000,000
Shelf
N/A
$96,358,500
Public Offering
9,000,000
$76,500,000
Public Offering
1,875,000
$62,308,000
Public Offering
3,000,000
$53,888,000
Public Offering
3,000,000
$75,000,000
Shelf
N/A
$179,371,250
Public Offering
8,500,000
$226,406,250
Public Offering
5,250,000
$412,551,000
Public Offering
9,000,000
$500,000,000
Shelf
N/A
$107,380,316
At the Market
2,668,298
$600,000,000
Shelf
N/A
$192,768,750
Public Offering
4,500,000
$663,090,000
Public Offering
12,000,000
$2,350,000,000
Private Placement
$179,917,500
Initial Public Offering
7,450,000
$33,520,190
Private Placement
1,466,325
$89,999,998
Private Placement
5,142,857
$150,000,000
Public Offering
6,000,000
$250,000,000
Shelf
N/A
$100,000,000
Shelf
N/A
$800,000,000
Shelf
N/A
$75,000,000
Shelf
N/A
$149,536,800
Public Offering
2,700,000
$30,001,000
Private Placement
1,579,000
$600,000,000
Shelf
N/A
$300,000,000
Shelf
N/A
$100,000,000
Shelf
N/A
$750,000,000
Shelf
N/A
$198,450,000
Public Offering
7,000,000
$381,018,000
Public Offering
11,000,000
$357,000,000
Public Offering
7,500,000
$121,980,000
Public Offering
6,000,000
$200,000,000
Shelf
N/A
$40,000,000
Private Placement
931,098
$1,900,000,000
Private Placement
22,792,706
$500,000,000
Shelf
N/A
$1,447,320,000
N/M
53,765,000
$110,100,000
Public Offering
11,900,000
$371,800,000
Public Offering
8,000,000
Price
$31.81
$41.70
$15.15
$14.55
$18.00
$29.74
$29.74
$27.85
$17.00
$54.56
$19.86
N/A
$86.35
N/A
N/A
N/A
$49.14
$47.66
N/A
$8.25
N/A
$9.31
$40.80
$16.84
$16.84
N/A
$18.35
$37.50
$39.86
N/A
$40.24
N/A
$37.25
$48.05
$21.00
$22.86
$17.50
$25.00
N/A
N/A
N/A
N/A
$48.16
$19.00
N/A
N/A
N/A
N/A
$28.35
$30.12
N/A
$20.33
N/A
$42.96
$83.36
N/A
$25.64
N/A
N/A
$14,726
Amounts shown before underwriting fees
Source: Raymond James research, Partnership Filings
15
Raymond James
U.S. Research
Since the beginning of the year, our coverage universe has seen ~$14.7 billion of equity issuances, while MLPs outside our universe
issued $9.3 billion in units. The issuances were largely used to repay borrowings on credit facilities and for general partnership
purposes. Total midstream and upstream issuances, including historical data, are shown in the tables below.
Upstream MLP Equity Offerings
Midstream MLP Equity Offerings
$4,000
$20,000
Preferred
$15,000
IPOs
Private
$10,000
Secondary
Public
$5,000
Equity Offerings in millions
Equity Offerings in millions
$25,000
$3,500
$3,000
$2,500
Preferred
$2,000
IPOs
Private
$1,500
Secondary
$1,000
Public
$500
$0
$0
2010
2011
2012
2013
2010
Source: Raymond James research
2011
* 2012
2013
*Includes LNCO offering
Per the preceding charts, so far in 2013 midstream MLPs have raised ~$19.0 billion in equity capital, almost equaling last year’s
aggregate issuances. As a result, the sector is on track to easily exceed last year in terms of capital raises. Similarly, upstream MLPs
have generated ~$1.1 billion of equity capital, putting the sector on track to exceed last year’s equity capital raising activities by
~22% when stripping out the LNCO offering.
Upstream MLP Debt Offerings
Midstream MLP Debt Offerings
$4,500
$25,000
40-Year
$15,000
30-Year
20-Year
15-Year
$10,000
10-Year
<10 Year
$5,000
Debt Offerings in millions
Debt Offerings in millions
$4,000
$20,000
$3,500
$3,000
40-Year
30-Year
$2,500
20-Year
$2,000
15-Year
$1,500
10-Year
<10 Year
$1,000
$500
$0
$0
2010
2011
2012
2010
2013
2011
2012
2013
So far in 2013, Midstream MLPs have raised ~$22 billion in debt capital. For the upstream MLP sector, debt issuances total ~$1
billion so far this year, which is largely in line with debt issuances over a comparable period last year. We would expect that over the
coming months, the record low interest rate environment will continue to support a mix of debt and equity capital, with lowerlevered companies relying more on debt funding than they have historically. While we believe that interest rates will eventually rise
with the economy, our outlook for a meaningful reversion in interest rates remains beyond 2015. That said, the visible growth in
longer-term debt, demonstrated by the issuance of 30- and 40-year paper indicates that MLPs are starting to lock in lower rates in
case the tide turns quicker than expected. All in, 2013 should be another banner year for debt offerings as midstream MLPs
continue to seek advantaged capital in light of the strong fundamental backdrop for production growth.
16
Raymond James
U.S. Research
Total Capital Raised by Upstream MLPs
Total Capital Raised by Midstream MLPs
$8
$50
$45
Debt Issuance
$40
Equity Issuance
$41.0
$7.5
Debt Issuance
$7
$39.4
$5.6
Equity Issuance
$5.4
$6
$30
$31.8
$5
$ Billions
$ Billions
$35
$27.5
$25
$4
$20
$3
$2.1
$15
$2
$10
$1
$5
$0
$0
2010
2011
2012
2010
2013
2011
2012
2013
Source: Raymond James research, Company Filings
Source: Raymond James research, Company Filings
Combining equity and debt capital, the above charts demonstrate the overall upward trend of MLP capital over the past several
years. In our view, this highlights the attractive fundamental backdrop for U.S. onshore and offshore infrastructure – particularly as
drilling continues to benefit from emerging shale plays, improved utilization, lower drilling costs, and high liquids prices. We note
that the vast majority of capital raising activities came from MLPs levered to liquids plays, including crude, condensate, and NGLs.
Even with our expectation that crude prices will be pressured in 2013 versus 2012, we believe that production will continue to
support midstream infrastructure in light of longer laterals, enhanced knowledge of production basins leading to better extraction,
and efficiency gains. In short, we expect the broader trend of increasing equity capital to remain a key theme for 2013.
Nominal Yields for MLP Debt Offerings
14.0%
NGLS
12.0%
CLMT
10.0%
ETP
FGP
NRGY PAA
ETP
XTEX
MMP
EPD
EPD
KMP
KMP BWP
PAA
EPD
NGLS
6.0%
ETP
ETP
EPD
PAA
4.0%
CLMT
CLMT
CLMT
CLMT
QRE
FGP
HEP
8.0%
KMP
CLMT
MMLP
EROC
EVEP
LGCY GLP EPD ETP
QRE
EVEP
LGCY
BBEPKMP
FGP
BBEP
SPH
EPB
BWP
NS
ETPE
TOO
MMLP
NRGY
NRGY APU
APU
SPH
NRGY
KMP
NGLS
APU NGLS
EPB
KMP
APU
TOO
TGP
ETP
EP
ETP
EPD
HEP
MEMP
TLLP
KMP
EPB
GEL
ETP
SEP
EPD
RGP
ACMPKMP EPD ACMP
KMP
NGLS
NGLS
KMP
WMB
ETP
ETP
ETP
EPBNS
KMP
PAA ETP
EPD
EROC
SEP
NS
SEP
ACMP
NGLS
BWP
WPZ
EPD
BWP KMP
MMP
KMP
ETP
BWP EPD
PAA MEMP
MMP
PAA
EPD
PAA
PAA
EPB
ETP
MMP
EPD
TGP
KMP
KMP
WMB
EPD
WPZ
EPD
BWP KMP
OILT
SEP
SEP
KMP
PAA
NGLS
2.0%
EPD
0.0%
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Initial Public Offerings
IPO activity has been high in the MLP sector over the past two years, with 13 IPOs in 2011 and 11 IPOs in 2012. So far in 2013, 11
new MLPs have already come to market: USA Compression Partners (USAC), CVR Refining (CVRR), Suncoke Energy Partners (SXCP),
New Source Energy Partners (NSLP), KNOT Offshore Partners (KNOP), Emerge Energy Services (EMES), Tallgrass Energy Partners
(TEP), Phillips 66 Partners (PSXP), Marlin Midstream (FISH), World Point Terminals (WPT), and QEP Midstream (QEPM). We expect
the pace of MLP IPOs to remain high this year as 1) companies look to spin off their midstream assets in order to maximize value and
2) the IRS expands the definition of “qualifying income” for MLPs.
17
Raymond James
U.S. Research
Initial Public Offerings by Year & Average Deal Size
18
350.00
$308.48
$293.88
16
$206.92
200.00
$163.19
17
8
150.00
13
6
13
11
9
$0.00
11
100.00
Average Deal Size ($MM)
Number of IPOs
300.00
250.00
$225.13
12
4
$275.64
$257.81
14
10
$280.65
7
50.00
2
3
0
2008
2009
0.00
0
2005
2006
2007
IPOs
2010
2011
2012
2013 YTD
Average Deal Size
Acquisition Activity
2013 Merger & Acquisition Activity (in millions)
Date
Buyer
Seller
Price
Multiple (EV/EBITDA)
Description
1/2/13
Targa Resources L.P.
Saddle Butte Pipeline, LLC
$950
17x
Purchasing crude oil pipeline and terminal system in Williston Basin
1/2/13
Calumet Specialty Products LP
NuStar Energy LP
$115
6-8x
San Antonio Refinery assets including ~$15 million of inventory
1/2/13
QR Energy, LP
Quantum Resources Fund
$145
Oil properties located in the Jay field in the Florida Gulf Coast area
1/3/13
Martin Midstream Partners LP
Quintana Energy Partners LP
$103
Talen's Marine & Fuel, LLC, including ten marine terminals on the Texas Gulf
1/9/13
Targa Resources L.P.
Unknown
$25
Purchased property on Houston Ship Channel to expand clean fuels and exports
1/30/13
Sinochem
Pioneer Natural Resources
$1,700
40% stake in 207,000 acres in Wolfcamp shale field
2/4/13
Global Partners LP
Basin Transload LLC
$85
5.0x
Adds 60% interest in Columbus and Beulah transload facilities (160 Mbpd cap.)
2/6/13
Marubeni Corporation
Williams Partners LP
$225
49% interest in Williams' first Gulfstar FPS project
2/22/13
LINN Energy, LLC
Berry Petroleum Corporation
$4,300
6.6x
LINN buyout of Berry Petroleum - first ever MLP acquisition of an E&P C-Corp
2/22/13
Magellan Midstream Partners LP
Plains All American Pipeline
$190
10-11x
800 miles of refined petroleum products pipelines (largely in Rockies and Southwest)
2/28/13
Florida Marine Transporters
$51
7x Cash Flow
Six liquefied petroleum gas pressure barges and two commercial push boats
3/1/13
Kinder Morgan Energy Partners LP
Kinder Morgan Inc.
$1,655
8.0x
50% interest in El Paso Natural Gas and the former El Paso Midstream assets
3/14/13
Spectra Energy Corporation
Kinder Morgan, et al
$1,490
11.5x
Express-Platte pipeline system including 1,717 miles of crude oil lines
3/21/13
Susser Petroleum Partners LP
Susser Holdings Corporation
$15
Sale Leaseback of three new Stripes locations
3/28/13
Memorial Production Partners LP Memorial Resource Development LLC
$200
6.7x
Oil and gas producing properties in East Texas and North Louisiana
3/31/13
Global Partners LP
Cascade Kelly Holdings LLC
$95
100% interest in a West Coast transload terminal and ethanol plant in Portland, OR
3/31/13
Capital Product Partners LP
Capital Maritime
$130
8.3x
Two 5,023 TEU high specification container vessels under 12 year charters
4/1/2013
Exterran Partners LP
Exterran Holdings
$174
363 compressor units and 50 customer service agreements
4/1/13
Vanguard Natural Resources, LLC
Range Resouces Corporation
$269
7.0x
Natural gas, oil and NGL assets in the Permian Basin in New Mexico and West Texas
4/1/2013
LRR Energy, LP
Lime Rock Resources
$38
Oil and natural gas properties in the Mid-Continent region in Oklahoma
4/4/13
Midstates Petroleum Company INC
Linn Energy LLC
$220
Interests in certain oil and gas properties located in the Texas/Oklahoma panhandle
4/8/2013
Unknown Third Party
Rhino Resource Partners LP
$11
20% royalty interest in its Utica Shale property
4/15/13
High Point Infrastructure, LLC
American Midstream GP, LLC
Assets + $15 MM Cash
8-9x
90% of American Midstream GP, 100% of the subordinated units, and 5.1 MM convertibles
4/30/2013
Energy Transfer Partners
Energy Transfer Equity
$3,750
11-12x
60% interest in HoldCo
4/30/2013
Regency Energy Partners LP
Southern Union Gathering Company's
$1,500
Purchased Southern Unions's natural gas pipeline affiliate including 5,600 miles of pipe
5/1/2013 Kinder Morgan Energy Partners LP
Copano Energy LLC
$4,878
15.7 Purchased 100% ownership of Copano Energy LLC
5/1/2013
Spectra Energy Partners
Spectra Energy Corporation
$823
11.4 100% of the Canadian portion and 40% of the U.S. portion of Express-Platte
5/10/2013
Mid-Con Energy Partners
Unknown
$28
60% working interest in Energy's Cushing Field and interests S. Oklahoma waterflood units
5/14/2013
High Crush Partners LP
D&I Silica, LLC
$125
5.3 Acquired 100% interest in D&I, an independent frac sand distributor
5/29/2013
Teekay Offshore Partners LP
Teekay Corporation
$204
Acquired 50% interest in the Cidade de Itajai FPSO
5/30/2013
Legacy Reserves LP
Resaca Exploitation, Inc.
$72
Acquired oil properties in the Permian Basin with 3.8 Mmboe of proved reserves
5/31/2013
Susser Petroleum Partners LP
Susser Holdings Corporation
$7
Sale Leaseback of two new Stripes locations
7/1/2013
NL Grease, LLC
7/3/2013
Tesoro Logistics Partners
Tesoro Corporation
$640
10 Carson logistics assets including 6 marketing and storage terminals (6.4 MMbbls)
6/15/2013
Crestwood Holdings
Inergy LP
$80
100% of Inergy's GP
6/15/2013
Inergy LP
Crestwood Gas Services GP LLC
$783
100% of Crestwood Midstream's GP
6/15/2013
Crestwood LP
Jackalope Gas Gathering
$108
Acquired 50% Interest within the Niobrara
7/1/2013
Inergy Midstream LP
Crestwood Midstream Partners LP
$1,450
Crestwood Midstream merged into Inergy Midstream
7/22/2013
Genesis Energy LP
Hornbeck Offshore
$230
8.0-8.5x
Nine barges and Nine tugs
8/27/2013
PAA Natural Gas Storage LP
Plains All American Pipeline LP
$1,085
15x
PAA purchase rest of PNG public units
YTD:
$27,948
18
Raymond James
Date
1/8/13
1/9/13
1/23/13
2/1/13
2/4/2013
3/1/2013
3/1/2013
4/1/2013
4/8/2013
5/1/2013
5/1/2013
5/7/2013
5/7/2013
5/8/2013
5/8/2013
5/15/2013
5/31/2013
Buyer
Crestwood Midstream Partners
Rose Rock Midstream, LP
Natural Resource Partners LP
Castleton Commodities Upstream
Blueknight Energy Partners LP
Western Gas Partners
Western Gas Partners
DCP Midstream Partners LP
Enbridge Inc.
MPLX LP
SemGroup Corporation
Atlas Pipeline Partners, LP
Seadrill Partners LLC
MarkWest Energy Partners LP
Sunoco Logistics Partners LP
TC Pipelines LP
New Source Energy Partners LP
U.S. Research
2013 Merger & Acquisition
Seller
Crestwood Holdings
SemGroup Corporation
Anadarko
Constellation Energy Partners
Advantage Pipeline, LLC
Anadarko Marcellus Midstream, LLC
Chesapeake Energy Corporation
DCP Midstream, LLC
Greengate Power Corporation
Marathon Petroleum Corporation
TEAK Midstream, LLC
Seadrill Ltd
Sunoco Inc
TransCanada Corporation
New Source Energy Corporation
YTD:
Activity by Partnerships Not Under Coverage (in millions)
Price
Multiple (EV/EBITDA)
Description
$258
Remaining 65% interest in Marcellus Shale joint venture
$274
33.3% interest in SemCrude Pipeline, L.L.C. which owns 51% of White Cliffs Pipeline
$310
20% common interest in OCI Wyoming Co., 100% of preferred, and certain GP interest
$63
Equity interest in Robinson's Bend Production II, LLC and Robinson's Bend Operating II
30% interest in Pecos River Pipeline, a 70 miles line connecting Pecos to Crane, TX
$490
33.75% interest in two gathering systems in the Marcellus Shale in north-central PA
$134
33.75% interest in Larry's Creek, Seely, and Warrensville gas gathering systems
$626
46.67% interest in DCP SC Texas GP - a joint venture in the Eagle Ford Shale
$600
300 MW Blackspring Ridge Wind Project in Vulcan County, Alberta
$100
Addt'l 5% interest in MPLX Pipe Line Holdings LP including Marathon and Ohio River lines
$300
200 miles of gathering pipelines and two gas processing plants in the Mississippi Lime
$1,000
6.9 100% of the equity interests of TEAK Midstream, a privately owned midstream operator
$310
Sold Tender Rig T15 including $100 million of debt on the assets
$245
8.2x
200 MMcf/d gas processing plant and 22 miles of gas gathering assets in Mid-con
$60
Marcus Hook terminaling and pipeline assets
$1,050
Addt'l 45% interest in Gas Transmission Northwest LLC and Bison Pipeline LLC
$7
Acquired additional properties in Golden Lane field with 1.1 MMBoe of proved reserves
$5,827
There have been 40 acquisitions so far in 2013 within our coverage universe that account for ~$28 billion in investments. The
majority of the acquisitions were related to crude oil transportation, gathering, and storage, while the remainder was largely a mix
between upstream E&P, natural gas gathering and processing, and natural gas transportation.
M&A Activity by Industry
Averge Multiple to EBITDA
Transaction Value
2012
2013
2012
2013
Crude oil and refined products storage
$
1,594 $
308
8.7x
5.0x
Crude oil and refined products transportation
$
6,966 $
9,523
6.8x
11.5x
Diversified
$
647 $
10.5x
Downstream fuel distribution
$
397 $
22
General Partners
$
2,340 $
N/A
8.5x
Marine transportation
$
265 $
385
7.0x
7.7x
Natural gas gathering & processing, storage, and fractionation
$
11,632 $
6,934
9.4x
15.7x
Natural gas transportation
$
34,114 $
1,655
7.0x
8.0x
NGL transportation and storage
$
1,877 $
225
8.9x
Propane
$
1,800 $
9.5x
Coal
$
50 $
11
Refining
$
175 $
115
11.0x
7.0x
Upstream exploration and production
$
1,348 $
6,972
7.0x
6.8x
Oilfield Services
$
$
125
5.3x
TOTAL
$
63,205 $
26,274
8.6x
8.4x
Source: Raymond James research, Raymond James coverage only
In total, midstream crude and gas assets accounted for ~33% of the gross acquisition activity. Upstream acquisition activity is also
out in front so far this year due to the acquisition of Berry Petroleum Corporation – the first MLP acquisition of an upstream C-Corp.
So far, EBITDA multiples are trending below the prior year at an average transaction value of 8.4x EBITDA.
19
Raymond James
U.S. Research
Equity Income Report (September 16, 2013)
After coming out of the gates running at the start of the year, the Alerian MLP Index (AMZ/440.09), which represents a diversified
group of the 50 most prominent Master Limited Partnerships (MLPs) using a float-adjusted, capitalization-weighted methodology,
has certainly slowed down on prospects that the Fed will taper its bond purchase program. The strong start to the year can be
attributed to 1) subdued market fears on the safety of the tax-advantaged status that currently benefits MLPs and other passthrough entities, 2) bullish sentiment in the broader stock market on the back of a temporary resolution to the fiscal cliff gridlock in
Washington, and 3) increasing institutional funds and interest in the MLP sector. Conversely, since then, MLPs have cooled down as
equity issuances and rising interest rates have taken their toll on investor appetite.
For the month of August, the AMZ index was down 3.2%, in line with the S&P 500 (loss of 3.1%), but well ahead of other yieldoriented equities such as REITs (loss of 7.0%) and the XLU utility index (loss of 5.0%). Meanwhile, MLPs are up 13.5% YTD,
outperforming REITs (-2.0%) and Utilities (+6.8%), but underperforming the S&P 500 (+14.5%). As a reminder, we forecast the AMZ
to appreciate 5-8% on a price basis in 2013, and along with 5-7% of distribution growth to provide total returns in the 10-15% range.
As such, we would not be surprised to see a slight pullback from current levels.
Regarding commodities and energy stocks, August was a mixed bag. WTI crude traded essentially flat for the month, while Brent
crude prices ended up 5.2%. Meanwhile, increased natural gas demand supported natural gas prices (+5.7%) as prices have fallen
enough to spur more coal-to-gas switching. However, with the loosening of the supply/demand balance, we believe natural gas
prices will remain range bound for most of 2013 and into 2014. Driven by the rally in crude oil prices and positive sentiment in the
broader market, the EPX posted a gain of 1.5%, however, the OSX traded down 2.1% on looser oil service dynamics. Looking ahead,
we maintain our longer-term bearish outlook on crude prices (and likewise the heavier end of the NGL barrel), as global crude
inventories begin to approach max capacity in sometime 2014. Although the AMZ has historically displayed a relatively high
correlation over the long term to the movements of energy prices, we believe that in the mid-term MLPs are well positioned to
withstand the volatility in energy prices due to protective contract structures exhibited by a lower average sector beta. With that
said, investors should continue to exhibit caution around commodity sensitive partnerships that have greater exposure to near-term
prices compared to firms that have hedged accordingly.
Concerning our long-term fundamental perspective, we believe the need for domestic midstream infrastructure remains in a secular
bull market. The rapid acceleration of domestic oil and gas production from unconventional, and often remote, sources has created
a growing need for pipeline, storage, and processing infrastructure that should help MLPs grow at a record pace over the next
several years. By our models, we believe the top five shale plays account for roughly 50% of the rigs currently drilling and are on
pace to account for 50%+ of incremental production over the next five to seven years. To keep pace with this production growth,
we estimate that over $10 billion per year of capital investment in new infrastructure will be necessary to fulfill the growth in
production from crude/condensate, refined products, natural gas, and NGLs over the next decade and beyond.
In short, our outlook on 1) crude oil transportation, storage, and logistics, and 2) NGL supply and logistics remains positive as the
exponential rise in the supply of both crude and natural gas liquids seems poised to spur above-average investment in midstream
infrastructure – serving as a key catalyst for future cash distribution growth. In addition, we believe that the fee-based structure of
MLPs coupled with long-term contracts creates added protection for dividend-focused investors. Our long-term fundamental thesis
remains intact and we reiterate our view that the MLP asset class remains a compelling investment when considering the long-term,
tax-advantaged total return potential.
In addressing selectivity, the characteristics core to our long-term thesis include: 1) geographic scale and asset diversity; 2) stable
and visible contracted cash flow from underlying assets; 3) scope in backlog via organic initiatives, i.e., low risk, low capital intensity
projects, and prudence in capital allocation regarding potential acquisitions; 4) the financial/liquidity flexibility to facilitate growth;
5) sound management with a track record of execution; and 6) greater transparency into above-average y/y cash distribution growth
without taking on disproportionate risk in achieving that objective. Again, although near-term commodity prices could affect the
following partnerships, we believe that these partnerships exemplify the aforementioned characteristics to outperform the market
on a longer-term basis which include: Enterprise Products Partners LP (EPD), Genesis Energy Partners LP (GEL), Magellan Midstream
Partners (MMP), Plains All American (PAA), Teekay LNG LP (TGP), Tesoro Logistics LP (TLLP), and Targa Resources Corp. (TRGP).
Among our upstream MLP coverage universe, we prefer Memorial Production (MEMP) and Mid Con Energy Partners (MCEP).
20
Raymond James
U.S. Research
MLP Priority List
RJ
Ticker Rating
Price
Yield
3-Yr ('12-'15)
Total Return
TTM
Dist.
Since
Total
Credit Rating
Debt/
Dist.
Cash
Total
Coverage
& Equivs.
9/19/13
9/19/13
CAGR
12/31/2012
Return
Mdy's
S&P
Capital
2013E
in 1000s
Enterprise Products Partners L.P.
EPD
SB1
$62.17
4.38%
5.96%
19.6%
11.3%
Ba a 1
BBB+
21%
1.38x
$45,300
Genesis Energy L.P.
GEL
MO2
$50.11
4.07%
10.65%
40.3%
51.3%
Ba 3
BB-
19%
1.23x
$18,668
MMP
MO2
$56.58
3.79%
13.73%
24.9%
25.5%
Ba a 2
BBB+
15%
1.29x
$119,491
Mid-con Energy Partners LP
MCEP
MO2
$23.40
8.60%
7.54%
34.9%
8.5%
NR
NR
11%
1.38x
$1,053
Memorial Production Partners L.P.
MEMP
SB1
$21.06
9.82%
4.97%
24.5%
26.7%
B2
B
48%
1.17x
$7,615
PAA
MO2
$53.13
4.41%
8.71%
14.5%
15.6%
Ba a 2
BBB
25%
1.33x
$16,000
Teekay LNG Partners L.P.
TGP
MO2
$43.65
6.17%
5.38%
17.2%
17.7%
NR
NR
38%
1.03x
$97,621
Tesoro Logistics L.P.
TLLP
MO2
$58.92
3.48%
16.62%
30.6%
30.3%
Ba 3
BB-
10%
1.25x
$75,837
Targa Resources Corporation
TRGP
MO2
$73.97
2.88%
27.92%
37.4%
47.8%
B3
NR
37%
1.20x
$82,900
5.3%
11.3%
27.1%
26.1%
24.9%
1.25x
11.6%
6.3%
MLP
Magellan Midstream Partners L.P.
Plains All American Pipeline L.P.
Average
Aleri a n MLP Index
AMZ-P
439.96
6.1%
Priced: 9/19/2013 (at close) Source: Thomson and Raymond James Research
This analysis does not include transaction costs and tax considerations. If included these costs would reduce an investor’s return. It should not be assumed that recommendations made in the future
will be profitable or will equal the performance of the securities in this list. Past performance is not indicative of future results. A complete record of our MLP Priority List and stock recommendations
for the trailing 12 months is available upon request.
NGL Update
NGL Prices Rebound on Stronger Crude Prices; Frac Spreads Widen on Higher NGL Prices and Weaker Gas Prices
While WTI crude prices ended the month of August flat, Brent prices were up ~5%, helping bolster NGL prices, which ended the
month up ~13% at $0.94/gallon or $39.69/barrel. Propane prices continue to rebound on increased demand for LPG exports and as a
petchem feedstock for ethylene production. While increased gas processing capacity will further accelerate NGL supplies, we
estimate that liquefied petroleum gas (LPG) exports will offset this supply growth and should provide support for propane prices.
Meanwhile, natural gas prices were down 10.5% for the month on higher than expected injections. This has helped bolster frac
spreads (MMBtu per NGL barrel minus the cost of natural gas), which ended the month up ~24% at $7.39 per MMBtu. While frac
spreads remain well below peak levels experienced in 2011 and early 2012, they have rebounded from their lows and continue to
provide producers enough uplift to incentivize continued production for liquid rich gas. Ethane prices remain in firmly entrenched in
rejection territory as it is taking ethylene producers some time to work down inventories. We estimate that about 200-250 Mbpd of
ethane rejection is occurring across the system and we should see persistent ethane rejection through 2013 and into 2014. Thus, we
believe ethane will continue to track fuel value (i.e., natural gas on an MMbtu level) until inventories are worked down to more
reasonable levels.
Composite Mt. Belvieu NGL Prices
Gulf Coast Frac Spreads (Henry Hub - Mont Belvieu)
$90.00
$16
$14
$70.00
$12
$60.00
$10
$50.00
$40.00
$30.00
Margin ($ per MMbtu)
Composite NGL Prices ($/barrel)
$80.00
$8
$6
$4
$2
$20.00
$0
$10.00
-$2
$0.00
Upper Range
Priced: 8/31/13; Source: Bloomberg, Raymond James Research
Weekly Frac Spread
Historical Median
Priced: 8/31/13 Source: Bloomberg; Raymond James Research
The following chart titled, “Monthly U.S. Steam Cracker Feedstocks and Utilization Rates,” details the positioning of NGLs as the
preferred feedstock for the production of ethylene. According to Hodson research, preliminary estimates suggest that the NGL
barrel (ethane, propane, and butane) accounted for ~92% of the aggregate feedslate for ethylene production in August. Ethylene
operating rates for the month of August were approximately 89-92%, with ethylene crackers consuming ~930-950 Mbpd of ethane,
21
Raymond James
U.S. Research
followed by 445-460 Mbpd of propane. As ethane remains in the driver’s seat in terms of ethylene margins, we should see ethylene
crackers reduce propane feedstock consumption.
Monthly US Steam Cracker Feedstocks and Utilization Rates (1/08 - 8/13)
Natural Gas and Component Natural Gas Liquids Prices (Since 2008)
2,000
100%
1,800
90%
1,600
80%
$25.00
1,400
70%
$22.50
1,200
60%
1,000
50%
800
40%
600
30%
400
20%
200
10%
$2.50
0%
$0.00
$27.50
$20.00
Price ($/MMBtu)
% Utilization
MBPD
$30.00
$17.50
$15.00
$12.50
$10.00
$7.50
0
Ethane
Propane
Butane
Naphtha
Gas Oil
$5.00
Natural Gasoline
Steam Cracker Utilization Rate
Source: Raymond James Research and Hodson data
9/08 Data Impacted for Comparability Purposes by Hurricane Ike
Isobutane
Normal Butane
Propane
Ethane
Natural Gas
Priced: 8/31/2013 Source: Raymond James Research, Bloomberg
While ethane continues to languish near its fuel value, propane prices and the heavier ends have significantly rebounded. This has
led to lower net margins of converting propane and naphtha into ethylene for the month, providing net margins of $0.32/lb. and
$0.01/lb., respectively. Meanwhile, ethane remains in the driver’s seat, generating strong net margins of $0.47/lb. Ethylene
margins should remain relatively robust for most of the year as the oversupply situation will continue to limit the upside for ethane;
however as expected, propane prices have continued to grind higher on increased LPG exports, leading to lower net margins. The
following chart (left) demonstrates that the ceiling for ethane (i.e., propane in terms of ethylene margins) has sharply climbed as
propane prices have risen on increased LPG exports and petchem demand. However, when adding transportation and fractionation
fees (T&F) – $0.05-0.18 depending on region – to the calculation for the floor price of ethane, Mont Belvieu (MB) priced ethane is
trading well below its fuel value, suggesting that ethane rejection is occurring throughout the country and not exclusively within the
Rockies and Midcon regions. Keep in mind that the “break-even” economics is most likely lower due to the fact that with ethane
rejection propane extraction decreases, thus gas processors do not want to forego the economic value from propane. In sum, we
estimate that 200-250 Mbpd of ethane rejection is occurring, mostly in the Rockies and Midcon region, and we anticipate this to
continue as ethane inventories remain at elevated levels.
Ethylene Profit Margin by Feedstock
Implied Ethane Floor and Ceiling
($ per Lb of Ethylene)
August 31, 2013
as of August 31, 2013
140.00
$0.70
120.00
$0.60
$0.50
$0.40
$ per Lb of Ethylene
cents pergallon
100.00
80.00
60.00
40.00
$0.30
$0.20
$0.10
$0.00
20.00
($0.10)
0.00
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Ethane Ceiling*
Apr-12
Jul-12
Floor**
Oct-12
Jan-13
Apr-13
Jul-13
($0.20)
Jan-11
Source: Bloomberg, Raymond James Research
Apr-11
Jul-11
Oct-11
Ethane
Ethane Price
Jan-12
Apr-12
Jul-12
Propane
Oct-12
Jan-13
Apr-13
Jul-13
Naphtha
*Ethylene economics from propane adjusted for co-product credits
**Natural gas fuel value
When attempting to model ethane’s competitive cost advantage vs. alternative feedstocks (naphtha, gasoil, etc.), it is very important
to consider the NGL barrel as a percent of crude oil as well as ethane relative to crude oil. From a historical standpoint, NGLs have
22
Raymond James
U.S. Research
traded at around 60-70% of the price of a barrel of crude; however, during the month of August, NGLs traded in the range of 34-38%
of crude. We believe the bifurcation of NGL prices to crude will continue, as ethane will continue to track with natural gas prices,
limiting the upside of these components of the NGL barrel. Meanwhile, the heavier ends (i.e., iso-butane, n-butane, and natural
gasoline) have remained relatively stable, providing the NGL uplift to keep prices relatively robust. However, we could see
continued bifurcation occur in some of the heavier ends as supply will begin to outpace demand. That being said, we believe that
the crude-to-gas ratio will remain wide enough that producers will continue to drill for NGLs.
Ethane as % of Crude Price
NGL as % of Crude Price
(As of 8/31/2013)
(As of 8/31/2013)
$160
120.0%
$140
RJ Forecast
$120
100.0%
Crude ($/bbl)
60.0%
$60
120.0%
$100
Ethane (% of crude
80.0%
$80
Current
Disconnect
$120
100.0%
$100
Crude ($/bbl)
140.0%
RJ Forecast
Current
Disconnect
$140
140.0%
80.0%
$80
60.0%
$60
40.0%
40.0%
$40
$40
20.0%
$20
$0
Jan-02
NGLs (% of crude
$160
$0
Jan-02
0.0%
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
WTI Crude ($/bbl)
Jan-08
Jan-09
Jan-10
Jan-11
Ethane as % of Crude
Jan-12
Jan-13
20.0%
$20
Jan-14
0.0%
Jan-03
Jan-04
Jan-05
Jan-06
WTI Crude ($/bbl)
Linear (Ethane as % of Crude)
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
NGL Composite % of Crude
Jan-12
Jan-13
Jan-14
Linear (NGL Composite % of Crude)
Ethane Outlook: August EIA Data Indicates Inventories Remain Elevated
Based on the most recent EIA data, ethane inventories remain near historical highs as plant downtimes continue to limit demand.
However, ethane rejection continues to slow the growth in ethane supply and we expect ethylene cracking utilization to increase
through most of the year. With that said, we believe that ethane prices will continue to track fuel value, even with total ethane
cracking capacity reaching ~1.15-1.18 MMbpd, by late 2013/early 2014. The excess supply of ethane at Mont Belvieu has minimized
the spread between Mont Belvieu and Conway, more of a result of the oversupply in Mont Belvieu (i.e., Mont Belvieu prices getting
weaker) compared to Conway strength.
Mont Belvieu-to-Conway Ethane Spread
U.S. Ethane Inventories
(Mbls)
$0.60
35,000
$0.50
30,000
$0.40
$/gallon
40,000
25,000
$0.30
$0.20
20,000
$0.10
15,000
10,000
Jan-01
$0.00
Jan-09
Jan-02
Jan-03
Jan-04
Range
Source: August 2013, EIA, Raymond James Research
Jan-05
Jan-06
Jan-07
Jan-08
Ethane Inventories
Jan-09
Jan-10
Average
Jan-11
Jan-12
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-13
($0.10)
Source: Bloomberg
Spread
Average
Ethane production declines on persistent ethane rejection; we model 200-250 Mbpd of ethane rejection. As you can see in the
following chart, total U.S. ethane production from gas processing plants declined by ~4% m/m as ethane rejection increased in
PADD IV. We estimate 200-250 Mbpd of ethane rejection, and we expect this trend to continue through the next 6-8 months as
ethane inventories are worked down to more normal levels. Meanwhile with the recent rebound in frac spreads, the crude-to-gas
ratio remains wide enough to incentivize further NGL production. With that said, given transportation costs and fractionation fees
associated with liquids production, further deterioration in NGL prices could lower netbacks to producers and slow production in the
outer plays with higher wells costs.
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Raymond James
U.S. Research
Region
PADD 1
PADD 2
Ind., Ill. and Ky.
Minn., Wis., Dak.
Okla., Kans., Mo.
PADD 3
Texas Inland
Texas Gulf Coast
La. Gulf Coast
N. La., Ark
New Mexico
PADD 4
PADD 5
Jun-12
0
147
33
0
115
593
381
58
81
4
70
172
0
Jul-12
0
121
18
0
103
614
393
59
84
3
75
156
0
Aug-12
0
155
42
0
112
610
400
57
74
4
75
169
0
Total
913
Source: EIA (as of August 2013)
891
934
Ethane Gas Plant Production by Region (Mbpd)
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
0
0
0
1
1
165
157
146
138
138
35
26
23
25
25
0
0
0
0
0
130
131
124
113
113
643
673
699
675
658
431
442
461
439
446
62
61
68
66
57
75
88
87
88
84
5
5
5
5
5
70
77
77
76
66
175
158
152
102
105
0
0
0
0
0
984
989
998
916
902
Feb-13
1
153
35
0
118
688
470
55
83
5
75
107
0
Mar-13
1
157
38
0
119
684
461
67
79
5
72
110
0
Apr-13
1
129
15
0
115
686
460
74
76
4
72
106
0
May-13
0
110
2
0
108
678
455
75
74
4
71
123
0
Jun-13
1
123
18
0
105
662
444
69
70
4
74
91
0
949
952
922
912
877
Propane Outlook:
LPG Exports Work Down Inventories Close to 5-year Average; However, PADD III Inventories Remain Well Above Normal Levels
As ethylene crackers have sustained high levels of propane consumption, LPG exports have also helped work down propane
inventories close to the five-year average and could trend below the five-year average by the start of 4Q13. PADD III sits at a ~2.1
MMbbl surplus y/y; however, Targa’s LPG export expansion should help absorb some of this excess supply going forward. With that
said, additional gas processing capacity is expected to arrive in 2H13, which should make the supply and demand dynamics within
propane very interesting.
U.S. Propane Inventories (MBbls)
(As of the week ending August 30, 2013)
80,000
75,000
70,000
65,000
60,000
55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
Jan
Feb
Mar
Apr
5 Yr Range
May
Jun
5 Yr Avg.
Jul
Aug
2012
Sep
Oct
2013
Nov
Dec
2013E
Source: EIA, Raymond James Research
Gulf Coast propane inventories: As you can see in the following chart, PADD III inventories are well above the five-year highs, but
continue to trend lower on increased LPG exports. This has provided propane a necessary outlet for the excess supply. We estimate
that PADD III inventories should continue to decline even further; however, it remains to be seen how the supply dynamics play out
as additional gas processing capacity arrives online as well. We need to keep an eye on PADD I inventories as a number of gas
processing facilities are expected to come online in the Marcellus, which should accelerate propane supply and subsequently lead to
higher propane inventories.
24
Raymond James
U.S. Research
PADD III U.S. Propane Inventories (MBbls)
(As of the week ending August 30, 2013)
36,000
34,000
32,000
30,000
28,000
26,000
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
8,000
Jan
Feb
Mar
Apr
May
5 Yr Range
Jun
5 Yr Avg.
Jul
Aug
2012
Sep
Oct
2013
Nov
Dec
2013E
Source: EIA, Raymond James Research
Will Light-End Ethylene Capacity Additions Be Enough?
As the growth in NGL production, and particularly ethane, continues to accelerate, the tug of war between supply and demand
dynamics remains on the minds of many investors. Given the ratable nature of NGL production competing against the backdrop of
ethylene capacity additions with long lead times, we believe ethane will remain structurally oversupplied until many of the ethylene
plants arrive online in 2016/2017. As it relates to the potential for incremental demand, some industry sources suggest ethane
demand could reach 1.0-1.1 MMbpd on a sustainable basis in 2013 (ethane demand briefly touched ~1 MMbpd during December
2011). For some time, the focus has been on additional cracker modifications (i.e., crackers being modified to crack the light ends of
the NGL barrel vs. the heavy end crude-based components), and that continues to be the case. In the chart below is a list of
announced ethylene expansions and total ethylene capacity for the U.S., which solidifies the industry’s commitment to natural gas
liquids.
Ethylene Cracker New Builds
Owner/Operator
Aither/Bayer
Formosa Plastics Corp.
ExxonMobil
Oxy/Mexichem
ChevronPhillips
Dow Chemical (DOW)
Sasol LTD
Shell Chemicals
Location
Appalachia, WV
Point Comfort, TX
Baytown, TX
Ingleside, TX
Cedar Bayou, TX
Freeport, TX
Lake Charles, LA
Pennsylvania
Total
Estimated Capacity
MMLB/Yr
Ethane Cracking
(Mbpd)
Estimated Completion
Probability
595
1,763
3,300
1,102
3,300
3,300
2,650
2,600
17
53
95
32
95
95
79
78
2015/2H15
2016/2H16
2016/2H16
2017/1H17
2017/2H17
2017/2H17
Late 2017/Early 2018
2018
Moderate
High
High
Moderate
High
High
Moderate
Low
18,610
544
Source: Company Data, Raymond James Research
25
Raymond James
U.S. Research
Ethane Cracking Increment Expansions/Enhancements
Year
End
2012
2013
2014
2015
2016
Increase in Ethane
Cracking Capabilities
(Mbpd)
42
68
72
41
51
Cumulative Increase in
Ethane Cracking Capabilities
(Mbpd)
42
110
182
223
273
Total Industry Ethane
Cracking Capabilities
(Mbpd)
1,092
1,160
1,232
1,273
1,323
Source: Raymond James Research; Company Data
Crude Oil Supply and Logistics Model
Inventory Builds Slowing Down as Gulf Coast Volumes Pick Up
Please note, because the DOE publishes data two months retroactively, we present a comparison for the two-month prior period.
After reconciling our model with the most recently reported EIA data, our May inventory estimate was 3% higher than actual
inventories while our June estimate was 2% lower than the actual value. Gulf Coast to Midwest volumes arrived lower than our
estimates for the month of June, followed by lower imports from Canada. In addition, PADD 2 movements to PADD 3 were lower
than anticipated. For reference, most Permian crude production winds up in Cushing, Oklahoma (part of PADD 2), but there are a
number of pipeline projects being constructed to move crude directly to the Gulf Coast (Longhorn, West Texas Gulf expansion,
BridgeTex, and Permian Express Phases I and II, among others).
26
Raymond James
U.S. Research
May 2013 Model Comparison
June 2013 Model Comparison
(Values in thousands of barrels)
Beginning Stock
Production
Inflow (Pipeline, Tanker, and Barge only)
Inflow (Truck)
Inflow (Canada)
Refinery Demand
Outflow
Railroad Outflow
Other in (out)
Actual RJ Estimates Diff
117,512
118,509
-0.8%
41,852
41,069
1.9%
36,851
35,846
2.8%
667
849 -21.4%
49,301
53,103
-7.2%
95,697
95,325
0.4%
18,621
19,230
-3.2%
20,839
20,839
0.0%
8,239 -13.7%
7,108
(Values in thousands of barrels)
Beginning Stock
Production
Inflow (Truck)
Inflow (Canada)
Refinery Demand
Outflow
Railroad Outflow
Other in (out)
118,134
118,134
0.0%
40,684
42,123
-3.4%
34,406
36,284
-5.2%
667
849 -21.4%
48,509
52,989
-8.5%
103,416
103,466
0.0%
17,940
20,301 -11.6%
20,150
21,339
-5.6%
14,457
7,420
94.8%
ENDING STOCK
118,134
ENDING STOCK
115,351
(Values in thousands of barrels per day)
Production
Inflow (Truck)
Inflow (Canada)
Refinery Demand
Outflow
Railroad Outflow
Other in (out)
1,325
1,325
0.0%
1,189
1,156
2.8%
22
27 -21.4%
1,590
1,713
-7.2%
3,087
3,075
0.4%
601
620
-3.2%
672
672
0.0%
229
266 -13.7%
(Values in thousands of barrels per day)
Production
Inflow (Truck)
Inflow (Canada)
Refinery Demand
Outflow
Railroad Outflow
Other in (out)
1,312
1,359
-3.4%
1,110
1,170
-5.2%
22
27 -21.4%
1,565
1,709
-8.5%
3,336
3,338
0.0%
579
655 -11.6%
650
688
-5.6%
466
239
94.8%
STOCK DRAW (BUILD)
(20)
122,222
(32)
-3.3%
12
Variance Table by Source and Use (000s Bbls, monthly)
Sources:
PADD 2 Production
PADD 1 to 2
PADD 3 to 2
PADD 4 to 2
Trucks in
Canadian Imports
Other in
Subtotal
Actual RJ Estimates
41,852
41,069
287
192
29,158
28,763
7,406
6,892
667
849
49,301
53,103
9,236
7,108
135,779
140,104
Uses:
Refinery Demand
PADD 2 to 1
PADD 2 to 3
PADD 2 to 4
PADD 2 Exports
Rail Out
Subtotal
95,697
226
14,660
1,888
1,847
20,839
135,157
TOTAL BUILD (DRAW)
622
95,325
500
15,495
1,811
1,425
20,839
135,394
4,710
90
STOCK DRAW (BUILD)
112,694
(73)
2.4%
163
Variance Table by Source and Use (000s Bbls, monthly)
Diff
783
95
396
514
(182)
(3,802)
(2,128)
(4,325)
372
(274)
(835)
77
422
0
(237)
(4,088)
Sources:
PADD 2 Production
PADD 1 to 2
PADD 3 to 2
PADD 4 to 2
Trucks in
Canadian Imports
Other in
Subtotal
Actual RJ Estimates
40,684
42,123
199
150
27,273
29,294
6,934
6,840
667
849
48,509
52,989
14,457
7,420
138,723
139,666
Diff
(1,439)
49
(2,021)
94
(182)
(4,480)
7,036
(943)
Uses:
Refinery Demand
PADD 2 to 1
PADD 2 to 3
PADD 2 to 4
PADD 2 Exports
Rail Out
Subtotal
103,416
498
14,695
1,887
860
20,150
141,506
103,466
500
16,487
1,900
1,415
21,339
145,106
(50)
(2)
(1,792)
(13)
(555)
(1,189)
(3,600)
(2,783)
(5,440)
2,657
TOTAL BUILD (DRAW)
At the end of June, PADD 2 crude stocks stood at 115.3 MMBbls (2% above our 112.7 MMBbls estimate). This represents a 2.4%
decrease from May’s stock of 118.1 MMBbls, and a y/y increase of 4.0%. We continue to forecast a reversal in PADD 2 crude stock
builds as several Permian to Gulf Coast pipelines come online and Cushing starts to clear following the Seaway expansion and
southern leg of Keystone XL. While these pipeline additions should start to remove the Midwest glut that has plagued WTI crude, we
believe that a looming light-sweet Gulf Coast glut is imminent. We estimate that Gulf Coast refineries and export optionality can only
handle another ~300-600 Mbpd of light and medium sweet volumes before the crude slate is challenged and lighter barrels begin to
see a discount. We continue to target the completion of Keystone XL south (likely 1Q14) for the full realization of such a scenario.
27
Raymond James
U.S. Research
PADD 2 Crude Stock
130,000
Crude Stock (000's of Bbls)
120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
Jan
Feb
Source: DOE
Mar
Apr
5 Yr Range
May
2012
Jun
Jul
5 Yr AVG
Aug
2013E
Sep
Oct
Nov
Dec
2013
Additional Supply and Logistics Data
Crude exports from PADD 2 were down 52% sequentially and down 33% on a y/y basis. Looking ahead, we expect exports from
PADD 2 to stay slightly above year-ago levels throughout 2013.
Crude Exports from PADD 2
80,000
Crude Flows (bpd)
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Jan
Source: DOE
Feb
Mar
5 Yr Range
Apr
May
2012
Jun
Jul
5 Yr AVG
Aug
Sep
2013E
Oct
Nov
Dec
2013
Flows from PADD 2 to the Gulf Coast were essentially flat on a sequential basis to 474 kbpd in June, and are up over 40% on a y/y
basis. As a result, flows to the Gulf Coast tracked above the five-year average by more than 250%. Following the completion of the
Seaway expansion and pending laterals, allowing for 275-350 Mbpd of throughput from Cushing to the Gulf Coast, we expect flows
out of PADD 2 to continue to exceed the five-year range for the remainder of 2013.
Background on PADD 2 to 3 flows: Historically, crude flows were directed from the Gulf Coast to the Midwest, as the Midwest was
one of the largest regions for North American petroleum consumption but was only capable of producing enough crude oil to satisfy
about a third of regional demand. During the late ‘80s and ‘90s, crude imports rose as regional crude production dropped in line
with declining reserves. However, over the past several years, production from the Bakken, Woodford, Mississippi Lime, and other
shale plays has begun to create supply builds once again. Exacerbating this reversal in fortune, crude from other regions is often
routed through Cushing, Oklahoma – considered to be part of PADD 2 (i.e., the Midwest petroleum region). Since Cushing was
28
Raymond James
U.S. Research
originally constructed as a bypass hub to serve flows from the Gulf Coast to the Midwest, there is a lack of takeaway capacity moving
in the opposite direction; hence, crude from other regions has been building at historic rates in PADD 2 (largely isolated at Cushing).
As a result of this dynamic, Midwestern demand for Gulf Coast crude has begun to decline and even reverse, as exhibited by rising
flows from PADD 2 to the Gulf and decreasing flows from the Gulf to PADD 2.
Crude Movements from PADD 2 (Midwest) to Gulf Coast
700,000
Crude Flows (bpd)
600,000
500,000
400,000
300,000
200,000
100,000
0
Jan
Source: DOE
Feb
Mar
Apr
5 Yr Range
May
2012
Jun
Jul
5 Yr AVG
Aug
2013E
Sep
Oct
Nov
Dec
2013
Turning to crude oil production in June, the reported value of 1,356 kbpd was up 0.4% sequentially and continues to track
significantly higher on a y/y basis at 22%. For the remainder of the year, we expect PADD 2 crude production to continue to grow at
a similar trajectory as in 2012.
PADD 2 Crude Oil Production
1,550,000
Crude Flows (bpd)
1,350,000
1,150,000
950,000
750,000
550,000
350,000
Jan
Source: DOE
Feb
Mar
Apr
5 Yr Range
May
Jun
2012
Jul
5 Yr AVG
Aug
Sep
Oct
Nov
Dec
2013
Crude inflows from the Gulf Coast (PADD 3) averaged 909 kbpd for the month of June, down ~6% relative to May and ~13% lower
than the prior year period. The general downward shift in inflows from PADD 3 is representative of greater reliance on regional (i.e.,
Midwest) production as exploration and production companies continue to take advantage of relatively high crude prices and
technological improvements for shale development (hydraulic fracturing, horizontal drilling, etc.). That said, as Permian production
has continued to benefit from the same production tailwinds, and given the pipeline constraints from the Permian to the Gulf Coast
(most of the Permian pipelines connect to Cushing, Oklahoma right now – considered part of PADD 2), it isn’t surprising to see flows
from PADD 3 to 2 trending a little higher in recent months. While we are modeling flows to be fairly steady during the first half of
29
Raymond James
U.S. Research
2013, we expect the completion of several pipeline projects from the Permian to the Gulf to drive flows lower than 2012 in the back
half of the year.
Crude Movements from Gulf Coast to PADD 2
1,800,000
Crude Flows (bpd)
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
Jan
Feb
Source: DOE
Mar
Apr
5 Yr Range
May
2012
Jun
Jul
Aug
5 Yr AVG
Sep
2013E
Oct
Nov
Dec
2013
Crude inflows from Canada averaged 1,617 kbpd for the month of June, up 1.7% sequentially and down 3.9% on a y/y basis. But
even with recent sequential declines in volumes, the reported flows were still relatively in line with last year’s levels. As we look
ahead, we are forecasting Canadian volumes to PADD 2 to exceed last year’s volumes by a small margin as Canadian production
ramps. For reference, the Canadian Association of Petroleum Producers (CAPP) projects that oil sands production will grow from 1.8
MMBpd in 2011 to 2.5 MMBpd in 2015, ramping to 4.5 MMBpd by 2025. In total, Canadian oil production is expected to top 3.8
MMBpd by 2015 from 3.0 MMBpd in 2011, and we expect ~60% of this to show up in PADD 2.
Crude Movements from Canada to PADD 2
2,150,000
Crude Flows (bpd)
1,950,000
1,750,000
1,550,000
1,350,000
1,150,000
950,000
Jan
Source: DOE
Feb
Mar
5 Yr Range
Apr
May
2012
Jun
5 Yr AVG
Jul
Aug
Sep
2013E
Oct
Nov
Dec
2013
Turning to refinery demand, due to refinery turnaround at BP’s Whiting refinery, Midwest refinery utilization remained at very low
levels as we originally modeled. Utilization of 88.5% in June is up from 81.9% during the previous month, but down from 93.1%
during the same month a year ago. Of note, we continue to model a rebound in refinery runs in the back half of 2013 as the impact
of major refinery turnarounds is reversed.
30
Raymond James
U.S. Research
PADD 2 Refinery Utilization
Refinery Utilization
100%
95%
90%
85%
80%
75%
Jan
Source: DOE
Feb
Mar
5 Yr Range
Apr
May
2012
Jun
Jul
5 Yr AVG
Aug
2013E
Sep
Oct
Nov
Dec
2013
Lastly, railroad outflow continued to gain momentum at over 650 kbpd in June. The surge in railroad volumes is increasingly
becoming a structural solution to crude differentials. In fact, we’ve recently noticed that pipelines out of the Bakken are
underutilized and Oneok’s Bakken Crude Express was cancelled due to lack of shipper interest. In short, producers are finding that
sending crude to the East/West Coasts by rail creates higher netbacks and better optionality than shipping via pipe. Although we
would note that rail volumes were slightly down in May from April due to tighter spreads, June’s rebound supports that the rail
dynamic will persist over the medium term and we anticipate the dynamic migrating more forcefully to West Texas when the Gulf
Coast light-sweet glut emerges in 2H13/1H14. For reference, we estimate that total crude-by-rail capacity could exceed 1.5 MMbpd
by the end of 2014 if all proposed projects get the green light, with 75% of this capacity dedicated to the Bakken. While difficult to
measure, we expect export volumes associated with barge/rail volumes to continue to ramp in the face of rising domestic
production chasing a dearth of pipeline transportation support (particularly on the Gulf Coast). Our view is supported by the
flexibility of rail and the ability to access the high demand coastal markets that are otherwise geographically limited in terms of
accessing Midcontinent crudes.
Largely Maintaining Estimates
With recent struggles surrounding the Seaway reversal and expansion project seemingly in the rearview as Gulf Coast volumes
continue to grow, we are reiterating our view that mid-2013 will produce escalated drawdown of Midwest inventories. As shown in
the following chart, we believe that the period of PADD 2 crude stock builds is largely behind us at this point. With a number of large
pipeline projects coming online (Seaway reversal, Keystone XL South, Longhorn reversal/expansion, West Texas Gulf expansion,
Permian Express, etc.), a broader pipeline network will soon be in place to help move log-jammed barrels to downstream refiners.
Moreover, with enhanced crude-by-rail terminal capability across the United States as well as increased barge usage, midstream
players should have the capacity to shift resources to virtually any area of the country where demand is sufficient to create margin
advantages.
31
Raymond James
U.S. Research
PADD 2: Crude Stock vs. Capacity Forecast
Storage and Stock Volumes (in MBbl)
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Crude Storage Capacity (Forecast)
Crude Stock (Forecast)
Crude Storage Capacity (Historic)
Crude Stock (Historic)
Source: DOE, Raymond James research
Outlook on the Rail Dynamic
Despite the recent compression in spreads, we continue to believe that crude-by-rail will play an important role in the future, adding
flexibility in delivery location and filling the gap between rising production and a shortage of pipelines solutions. While new
pipelines will certainly help relieve the Cushing bottleneck in the short term, our production model shows that ramping volumes
could challenge PADD 2 storage capacity in the latter half of the decade if further large-scale outlets aren’t put in place (i.e.,
Keystone XL North, etc.). In the short term, once several large pipeline solutions are complete including Keystone XL South (1Q14),
the bottleneck is likely to shift south to the Gulf, where only 300 to 600 Mbpd of additional light to medium volumes can be
consumed or re-routed before stressing local refinery capacity. At that point, we expect refiners to discount such volumes, creating
a double discount for light sweet barrels (i.e., LLS discounted to Brent, and WTI discounted to LLS). Separately, there is only so much
barge capacity to take excess crude (either via the ocean or via inland channels) to other markets (we estimate 100,000 bpd of
volumes could still move via coastal barge). The largest hurdles for creating crude price transparency between middle-U.S. markets
and the East and West coasts remain twofold. Firstly, it would be uneconomic to build a new pipeline from the Gulf Coast to either
the East or West coasts – a view that is further reinforced with Kinder’s recent decision to scrap the Freedom Pipeline. Second,
barge shipments are limited due to the Jones Act, which forces shippers to use U.S. built and manned ships, which are in scarce
supply, for crude shipments. All these dynamics should combine to drive a double discount: WTI to LLS, and LLS to Brent by 1H14 –
just as the pipeline solutions seemingly fix the problem. In short, we do not foresee pricing parity between WTI and Brent. Keeping
in line with this view, we are forecasting an average spread of $9.00 in 2013, as shown below.
RJ&A Oil Price Estimates (as of September 2013)
WTI
Brent
2013 Estimates
Current RJ Oil
Current RJ Oil
Brent-WTI Spread
Q1 13A
$94.00
$113.00
Q2 13A
$94.00
$103.00
Q3 13E
$107.00
$110.00
Q4 13E
$105.00
$110.00
2013E
$100.00
$109.00
$19.00
$9.00
$3.00
$5.00
$9.00
Crude Movements: Expanding, but Historic Trajectory Remains Muted
As the following graphic demonstrates, interregional flows (i.e., between Petroleum Administration for Defense Districts “PADDs”)
have been in decline mode over the past several years. This was largely the result of the Bakken production phenomenon, which
helped to offset crude flows from the Gulf Coast to the Midwest. Historically, the Midwest relied on interregional imports to
support its heavy demand burden as local production was inadequate. However, given that most of the production in the Bakken is
part of PADD 2 (i.e., the Midwest), the production boom has helped to offset crude inflows from other regions. Also interesting is
the fact that there is a similar but opposite trend developing from the Midwest to the Gulf (PADD 2 to PADD 3). As more capacity
32
Raymond James
U.S. Research
comes online from Cushing to the South, we expect PADD 2 to PADD 3 flows to continue to climb. That said, if the following graphic
demonstrates anything with authority, it demonstrates that PADD 2 is the big kid on the block when it comes to interregional crude
flows – and will be for some time. Cushing is part of PADD 2, after all. Separately, we are beginning to see increasing movements of
crude from PADD 4 to PADD 2 and PADD 2 to PADD 4. While this can largely be traced back to the Bakken, one other significant play
is also contributing: the Niobrara. We suspect that Niobrara volumes will play an expanded role in defining crude movements over
the coming years, particularly as pipeline capacity from the Niobrara to the Gulf Coast begins to ramp. The bottom line is that the
following graphic serves to demonstrate the magnitude of crude flows between regions (domestic at least) and since crude
differentials are only going to apply to crude movements (i.e., you have to pay to ship the crude to higher demand markets), the
flow data remains an important metric in ascertaining the price differential phenomenon that has been a hot topic for a few years.
Crude Movements between PADDs by Pipeline and Ship (000s Bbls /year)
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2006
1 to 2
2007
1 to 3
2008
2 to 1
2009
2 to 3
2 to 4
2010
3 to 1
2011
3 to 2
2012
4 to 2
2013E
4 to 3
Source: EIA, Quarterly values annualized for comparison purposes
33
5 Yr Range
5 Yr AVG
2012
17,000
2013
5 Yr Range
5 Yr AVG
2012
2012
8,050
7,800
Week 51
8,300
Week 51
8,550
Week 49
8,800
Week 49
9,050
Week 47
9,300
Week 47
U.S. Finished Motor Gasoline Demand
Week 45
9,550
Week 45
2013
Week 43
2012
Week 43
Week 41
Week 39
Week 37
Week 35
Week 33
Week 31
Week 29
Week 27
Week 25
Week 51
Week 49
Week 47
Week 45
Week 43
Week 41
Week 39
Week 37
Week 35
Week 33
Week 31
Week 29
Week 27
Week 25
Week 23
Week 21
Week 19
Week 17
Week 15
2012
Week 41
Week 39
Week 37
18,000
5 Yr AVG
Week 35
19,000
5 Yr AVG
Week 33
20,000
5 Yr AVG
Week 31
21,000
Week 29
U.S. Petroleum Products Demand
Week 27
5 Yr Range
Week 25
2013
Week 23
190,000
Week 23
5 Yr Range
Week 21
200,000
Week 13
5 Yr Range
Week 21
210,000
Week 19
220,000
Week 19
180,000
Week 17
U.S. Gasoline Inventories
Week 17
250,000
Week 15
2013
Week 13
230,000
Week 51
Week 49
Week 47
Week 45
Week 43
Week 41
Week 39
Week 37
Week 35
Week 33
Week 31
Week 29
Week 27
Week 25
Week 23
Week 21
Week 19
Week 17
Week 15
Week 13
Week 11
Week 9
Week 7
Week 5
Week 3
Week 1
Week 51
Week 49
Week 47
Week 45
Week 43
Week 41
Week 39
Week 37
Week 35
Week 33
Week 31
Week 29
Week 27
Week 25
Week 23
Week 21
Week 19
Week 17
Week 15
Week 13
Refinery Utilization
Total U.S. Petroleum Inventories
Week 15
48,000
Week 13
10,000
Week 11
15,000
Week 11
20,000
Week 11
25,000
Week 9
30,000
Week 9
2013
Week 9
35,000
Week 7
40,000
Week 7
45,000
Week 7
50,000
Week 5
55,000
Week 5
U.S. Heating Oil Inventories
Week 5
65,000
Week 3
Week 9
Week 11
950,000
Week 1
65.0%
Week 7
1,000,000
Week 3
60,000
Residual Fuel Inventory (000 Bbl.)
70.0%
850,000
Week 5
1,050,000
Week 1
240,000
Distillate Inventory (000 Bbl.)
Week 51
Week 49
Week 47
Week 45
900,000
Week 3
1,100,000
Week 3
22,000
Gasoline Demand (000 Bbl. per day)
Week 51
Week 49
Week 47
Week 45
Week 43
Week 1
Total Petroleum Inventory (000 Bbls)
1,150,000
Week 1
Week 51
Week 49
Week 47
Week 45
Week 43
Week 41
Week 39
Week 37
Week 35
Week 33
Week 31
Week 29
Week 27
Week 25
Week 23
Week 21
Week 19
Week 17
Week 15
Week 13
Week 11
Week 9
2012
Week 43
2012
Week 41
Week 39
Week 37
Week 35
2012
Week 41
Week 39
Week 37
5 Yr AVG
Week 35
5 Yr AVG
Week 33
Week 31
Week 29
Week 27
Week 25
Week 23
Week 21
Week 19
Week 17
Week 15
Week 13
Week 11
Week 9
Week 7
Week 5
5 Yr AVG
Week 33
Week 31
Week 29
5 Yr Range
Week 27
90,000
Week 7
5 Yr Range
Week 25
100,000
170,000
Week 5
Week 3
Week 1
5 Yr Range
Week 23
Week 21
Week 19
180,000
Week 3
Heating Oil Inventory (000 Bbl.)
70,000
Week 17
Week 1
Gasoline Inventory (000 Bbl.)
1,200,000
Week 15
Week 13
Week 11
Week 9
Week 7
Week 5
Week 3
Week 1
Petroleum Demand (000 Bbl. per day)
Raymond James
U.S. Research
95.0%
U.S. Refinery Utilization
90.0%
85.0%
80.0%
75.0%
2013
46,000
U.S. Residual Fuel Inventories
44,000
42,000
40,000
38,000
36,000
34,000
32,000
30,000
28,000
2013
170,000
U.S. Distillate Inventories (incl. Diesel Fuel and Heating Oil)
160,000
150,000
140,000
130,000
120,000
110,000
2013
Source: DOE
34
Raymond James
U.S. Research
Our Favorite Names
Although current valuations suggest that the asset class remains slightly overvalued based on historical medians, long term, we
believe the sector remains in a secular bull market that offers investors a compelling “total return” investment. Thus, while
valuations may appear to be at a premium on an absolute basis vs. historical medians, we believe 1) the prolonged low interest rate
environment, 2) demand for energy infrastructure, and 3) low correlation to the broader markets and commodity prices will help
facilitate yield compression for the AMZ and income to outperform the broader market on a relative basis (inclusive of yield).
Our favorite names in the MLP sector are those that possess the following characteristics: 1) geographic scale and asset diversity, 2)
stable/visible contracted cash flow from underlying assets, 3) scope in backlog via organic initiatives, 4) solid balance sheet/financial
liquidity, 5) solid hedging profile, and 6) sound management with a track record of execution. Acknowledging that near-term
commodity prices could experience pressure through 2013, we believe that the aforementioned attributes should provide riskaverse cash flows in the near term, with the potential for above-average relative distribution growth over the longer term.
Furthermore, the yield spread bifurcation across the asset class will continue to become more pronounced as those MLPs with the
most advantageous weighted average cost of capital (WACC) structures continue to post relative outperformance with regard to the
slope of future DCF/unit growth. The partnerships that exemplify such characteristics are Strong Buy-rated Enterprise Products
Partners (EPD) and Outperform-rated Plains All American (PAA), Targa Resources Corp. (TRGP), Williams Partners (WPZ), Magellan
Midstream Partners (MMP), Genesis Energy Partners (GEL), Delek Logistics Partners (DKL), Oiltanking Partners (OILT), Tesoro
Logistics (TLLP), and Energy Transfer Equity (ETE).
Within the maritime subsector, the fundamental theme focuses upon the long-term secular trend of a tightening global
supply/demand hydrocarbon balance. This should yield increasing utilization, longer-duration contracts, the opportunity for visible
growth, and improved pricing. Amid current market volatility, we continue to focus on maritime MLPs with a stable asset base,
longer-duration fixed contracts, and the ability to preserve cash flow integrity. The companies that most embody the
aforementioned criteria are Outperform-rated Teekay LNG Partners (TGP) and Teekay Offshore Partners (TOO).
Lastly, in the upstream MLP sector, our bullish outlook for the sector is predicated on the massive consolidation opportunities of
mature oil and gas properties in the continental United States, the most developed oil and gas region in the world. Within the
space, we continue to steer investors towards partnerships with a disciplined hedging approach (locking in cash margins for 4-6
years), sound balance sheets, management teams with a good track record of accretive acquisitions of low decline rate properties,
and a balanced portfolio of organic growth opportunities. The partnerships that most embody the aforementioned criteria are
Strong Buy-rated Memorial Production Partners (MEMP) as well as Outperform-rated Midcon Energy (MCEP) and LINN Energy
(LINE).
In summary, we believe these core names will continue to provide solid returns for unitholders through sustained financial discipline
and prudent deployment of discretionary cash flow, a continued focus on cost rationalization and margin optimization, and
preserving and enhancing value to unitholders.
35
Raymond James
U.S. Research
RAYMOND JAMES ENERGY RESEARCH - MASTER LIMITED PARTNERSHIPS COMPARISON TABLES
Market Valuation
($MM)
Enterprise
Value
RJ
Rating
Price
9/19/13
Current
Yield
Avg. Trading
Volume
Float
Market
Cap
CRUDE / REFINED PRODUCT TRANSPORTATION & STORAGE
HEP
HOLLY ENERGY PARTNERS LP
MMP
MAGELLAN MIDSTREAM PARTNERS LP
NS
NUSTAR ENERGY LP
PAA
PLAINS ALL AMERICAN PIPELINE LP
TLLP
TESORO LOGISTICS LP
OILT
OILTANKING PARTNERS LP
GEL
GENESIS ENERGY PARTNERS LP
DKL
DELEK LOGISTICS PARTNERS LP
AVERAGE
MP3
MO2
MP3
MO2
MO2
MO2
MO2
MO2
$33.54
$56.58
$38.62
$53.13
$58.92
$51.50
$50.11
$30.55
5.8%
3.8%
11.2%
4.4%
3.5%
3.3%
4.1%
4.9%
5.1%
77.7
603.0
723.5
967.5
100.8
33.2
705.4
27.4
61.0%
99.8%
96.7%
98.8%
60.2%
29.4%
85.3%
34.8%
$1,933
$12,241
$2,947
$17,514
$1,810
$977
$4,350
$370
NATURAL GAS / NGL TRANSPORTATION & STORAGE
BWP
BOARDWALK PIPELINE PARTNERS LP
ACMP ACCESS MIDSTREAM PARTNERS LP
EPB
EL PASO PIPELINE PARTNERS LP
ETP
ENERGY TRANSFER PARTNERS LP
EPD
ENTERPRISE PRODUCTS PARTNERS LP
KMP
KINDER MORGAN ENERGY PARTNERS LP
NKA
NISKA GAS STORAGE PARTNERS LLC
PNG
PAA NATURAL GAS STORAGE LP
SEP
SPECTRA ENERGY PARTNERS LP
WPZ
WILLIAMS PARTNERS LP
AVERAGE
MU4
MO2
MP3
MP3
SB1
MP3
MU4
MP3
MO2
MO2
$30.42
$47.13
$41.94
$52.11
$62.17
$80.28
$14.94
$23.15
$44.04
$52.90
7.0%
4.0%
6.0%
6.8%
4.4%
6.6%
9.4%
6.1%
4.6%
6.6%
6.1%
372.7
436.8
473.9
874.6
1158.7
1767.0
42.3
299.1
149.6
698.3
81.1%
53.7%
57.3%
73.3%
61.5%
66.2%
99.5%
11.7%
41.4%
36.2%
$7,243
$9,126
$8,942
$19,371
$55,648
$34,908
$502
$1,378
$4,641
$22,501
NATURAL GAS GATHERING & PROCESSING
XTEX
CROSSTEX ENERGY LP
EROC
EAGLE ROCK ENERGY PARTNERS LP
NGLS
TARGA RESOURCES PARTNERS LP
AMID
AMERICAN MIDSTREAM PARTNERS LP
SXE
SOUTHCROSS ENERGY PARTNERS LP
RGP
REGENCY ENERGY PARTNERS LP
AVERAGE
MP3
MU4
MO2
MP3
MP3
MP3
$19.63
$6.99
$50.60
$21.59
$17.53
$27.97
6.7%
12.6%
5.6%
8.0%
8.9%
6.6%
8.3%
314.4
676.2
333.9
5.1
27.7
346.8
80.6%
98.3%
85.7%
38.5%
42.3%
68.5%
UPSTREAM
BBEP
BREITBURN ENERGY PARTNERS
EVEP
EV ENERGY PARTNERS LP
LGCY
LEGACY RESERVE LP
LINE
LINN ENERGY LLC
LRE
LRR ENERGY LP
MEMP MEMORIAL PRODUCTION PARTNERS
MCEP
MID-CON ENERGY PARTNERS
PSE
PIONEER SW ENERGY PARTNERS LP
QRE
QR ENERGY LP
VNR
VANGUARD NATURAL RESOURCES LLC
AVERAGE
MO2
MO2
MO2
MO2
MO2
SB1
MO2
MP3
MO2
MO2
$17.98
$37.72
$27.25
$25.96
$15.65
$21.06
$23.40
$43.65
$16.94
$28.00
10.7%
7.9%
8.3%
11.0%
12.4%
9.8%
8.6%
4.8%
11.7%
8.6%
9.4%
599.0
175.5
111.59
2868.79
103.56
157.96
53.90
65.71
160.87
310.98
RETAIL PROPANE DISTRIBUTORS
APU
AMERIGAS PARTNERS LP
FGP
FERRELLGAS PARTNERS LP
SPH
SUBURBAN PROPANE PARTNERS LP
AVERAGE
MP3
MU4
MP3
$43.56
$22.14
$46.23
7.7%
9.0%
7.5%
8.1%
MARITIME TRANSPORTATION
CPLP
CAPITAL PRODUCT PARTNERS LP
TGP
TEEKAY LNG PARTNERS LP
TOO
TEEKAY OFFSHORE PARTNERS LP
GMLP
GOLAR LNG PARTNERS LP
KNOP KNOT OFFSHORE PARTNERS LP
AVERAGE
MP3
MO2
MO2
MP3
MO2
$8.87
$43.65
$32.83
$33.55
$24.60
DIVERSIFIED
CLMT
CALUMET SPECIALTY PRODUCTS LP
GLP
GLOBAL PARTNERS LP
MMLP MARTIN MIDSTREAM PARTNERS LP
AVERAGE
MP3
MP3
OP2
MP3
MO2
MP3
MO2
MP3
MO2
MO2
GENERAL PARTNERS
XTXI
CROSSTEX ENERGY INC
ETE
ENERGY TRANSFER EQUITY LP
NRGY
INERGY LP
KMI
KINDER MORGAN INC
NSH
NUSTAR GP HOLDINGS LLC
TRGP
TARGA RESOURCES CORP
WMB
WILLIAMS COMPANIES INC
AVERAGE
Source: Raymond James Research; Thomson
$2,695
$14,151
$5,442
$25,157
$3,423
$2,134
$5,277
$714
3-Year
2012-15
CAGR
Distribution Growth / Coverage
2013E
vs. '12
Coverage
Distr.
Growth
Ratio
Distr.
6.2%
13.7%
0.8%
8.7%
16.6%
16.5%
10.7%
8.6%
10.2%
$1.96
$2.18
$4.38
$2.38
$2.08
$1.74
$2.07
$1.60
6.5%
16.2%
0.0%
10.0%
21.3%
18.0%
10.6%
NM
11.8%
1.00x
1.29x
0.71x
1.33x
1.25x
1.77x
1.23x
1.44x
$10,508
$11,861
$10,750
$40,338
$70,492
$57,226
$1,147
$1,934
$5,695
$29,276
0.8%
15.4%
6.8%
3.6%
6.0%
6.2%
1.4%
0.5%
7.7%
7.3%
5.6%
$2.13
$1.98
$2.55
$3.61
$2.74
$5.33
$1.40
$1.43
$2.05
$3.48
0.0%
15.5%
13.3%
0.8%
6.5%
7.0%
0.0%
0.0%
5.1%
8.6%
5.7%
0.99x
1.49x
1.07x
1.41x
1.38x
1.01x
1.20x
1.03x
0.98x
0.95x
$1,714
$1,099
$5,201
$102
$221
$5,824
$2,800
$2,237
$7,981
$422
$731
$9,556
7.6%
0.0%
10.5%
4.4%
3.6%
4.2%
5.2%
$1.37
$0.88
$2.90
$1.78
$1.60
$1.87
3.8%
0.0%
11.0%
2.6%
0.0%
1.6%
3.5%
97.6%
85.9%
80.6%
84.2%
47.7%
74.1%
94.2%
47.3%
89.1%
99.5%
$1,793
$1,588
$1,546
$6,343
$409
$809
$452
$1,566
$963
$2,151
$2,767
$2,554
$2,408
$12,819
$638
$1,545
$510
$1,716
$2,210
$3,183
3.9%
4.6%
4.8%
4.0%
1.1%
5.0%
7.5%
0.0%
0.2%
3.4%
3.5%
$1.93
$3.08
$2.33
$2.95
$1.94
$2.05
$2.08
$1.56
$1.95
$2.48
126.04
142.44
105.45
42.4%
65.8%
99.6%
$4,065
$1,751
$2,762
$6,458
$2,925
$3,834
4.9%
0.0%
2.1%
2.3%
10.3%
6.2%
6.3%
6.1%
0.0%
7.2%
265.95
100.70
116.29
118.41
24.08
78.0%
63.8%
67.6%
57.8%
93.6%
$749
$2,969
$2,583
$1,358
$207
$1,390
$5,084
$4,497
$3,380
$614
$30.71
$34.67
$46.03
8.9%
6.9%
6.8%
7.5%
219.44
23.78
35.89
75.3%
56.5%
75.3%
$1,922
$909
$1,189
$20.85
$64.29
$13.67
$36.78
$20.28
$73.97
$36.84
2.3%
4.0%
3.7%
4.3%
10.7%
2.9%
4.0%
4.6%
159.3
549.8
499.49
9301.62
381.60
197.34
8225.26
91.2%
66.0%
86.6%
71.4%
80.4%
91.9%
99.6%
$975
$17,817
$2,283
$37,560
$859
$3,085
$24,547
Coverage
Ratio
Raymond James Valuation Ratios
Enterprise Value/
Price/
EBITDA
DCF (Adj for GP)
2013E
2014E
2013E
2014E
Leverage Ratios
Debt/
2013E
2014E
Enterprise
Value
13.64x
17.02x
11.78x
11.35x
18.10x
15.83x
19.43x
10.80x
14.75x
12.24x
15.21x
10.14x
10.64x
11.42x
13.14x
15.05x
10.12x
12.25x
17.11x
19.89x
13.43x
15.14x
14.21x
16.45x
19.82x
6.59x
15.33x
15.42x
17.63x
10.91x
15.16x
10.57x
14.55x
15.38x
6.07x
13.21x
4.12x
3.30x
4.70x
2.86x
1.85x
1.50x
4.22x
0.00x
2.82x
3.62x
3.09x
4.54x
2.68x
1.17x
1.25x
3.03x
0.00x
2.42x
30%
15%
45%
25%
10%
9%
19%
0%
19%
EBITDA
6.1%
14.9%
0.0%
8.4%
15.4%
18.4%
10.9%
10.0%
10.5%
1.04x
1.27x
0.82x
1.25x
1.15x
1.77x
1.42x
1.42x
$2.13
$2.28
$2.66
$3.78
$2.90
$5.67
$1.42
$1.43
$2.28
$3.72
0.0%
15.4%
4.3%
4.9%
5.8%
6.4%
1.4%
0.0%
11.0%
6.9%
5.6%
1.00x
1.45x
1.11x
1.50x
1.33x
1.02x
1.33x
1.03x
1.06x
0.95x
13.50x
14.03x
9.47x
9.80x
15.20x
9.90x
6.31x
15.91x
19.37x
12.99x
12.65x
12.65x
11.10x
8.57x
8.81x
14.61x
9.66x
8.82x
15.88x
3.83x
9.59x
10.35x
14.55x
16.99x
23.75x
13.73x
16.01x
14.59x
7.84x
15.89x
22.20x
13.91x
15.95x
14.36x
14.70x
21.60x
12.16x
15.74x
13.41x
7.49x
15.72x
18.15x
10.24x
14.36x
4.44x
4.25x
3.68x
3.94x
3.18x
3.35x
3.62x
4.09x
3.06x
3.17x
3.68x
4.42x
4.24x
3.33x
3.55x
3.06x
3.55x
5.05x
4.08x
3.74x
2.34x
3.74x
31%
23%
39%
40%
21%
33%
57%
26%
12%
24%
31%
1.07x
0.74x
1.02x
1.16x
0.62x
1.06x
$1.52
$0.88
$3.20
$1.89
$1.64
$1.98
10.9%
0.0%
10.5%
6.5%
2.2%
5.6%
6.0%
1.05x
0.75x
1.14x
1.13x
1.07x
1.07x
12.41x
9.17x
12.98x
16.48x
19.11x
15.70x
14.03x
9.26x
8.61x
10.16x
11.69x
12.89x
13.04x
10.52x
15.53x
10.81x
15.94x
10.88x
15.02x
15.29x
13.63x
12.26x
10.55x
12.65x
7.02x
10.68x
12.05x
10.63x
5.03x
4.75x
4.31x
4.83x
6.18x
4.56x
5.02x
5.25x
4.46x
3.37x
3.42x
4.17x
4.05x
4.13x
35%
52%
33%
29%
32%
31%
36%
4.3%
0.5%
3.6%
1.6%
1.6%
4.5%
7.8%
0.0%
0.6%
3.1%
2.8%
1.11x
0.86x
1.24x
1.03x
0.98x
1.17x
1.38x
0.00x
1.08x
1.04x
$2.01
$3.19
$2.41
$3.13
$1.94
$2.11
$2.24
$0.00
$1.95
$2.57
4.1%
3.8%
3.4%
6.3%
0.1%
2.9%
7.7%
-100.0%
0.0%
3.6%
-6.8%
1.14x
1.40x
1.15x
1.33x
1.09x
1.28x
1.35x
0.00x
1.23x
1.23x
7.04x
11.26x
8.31x
7.47x
7.99x
8.19x
7.43x
14.64x
8.11x
9.75x
9.02x
5.41x
6.92x
7.78x
4.80x
6.23x
5.51x
6.68x
12.43x
6.81x
7.67x
7.02x
8.11x
14.18x
9.22x
8.16x
8.10x
7.03x
8.04x
18.41x
7.20x
11.09x
9.95x
6.26x
7.86x
8.94x
4.94x
6.22x
4.99x
7.60x
15.54x
5.77x
7.97x
7.61x
2.52x
4.16x
2.94x
3.65x
3.03x
3.90x
0.85x
1.50x
2.85x
3.06x
2.85x
1.94x
2.56x
2.76x
2.34x
2.36x
2.62x
0.76x
1.27x
2.39x
2.40x
2.14x
36%
37%
35%
49%
38%
48%
11%
10%
35%
31%
33.1%
$3.32
$2.00
$3.50
5.0%
0.0%
2.6%
2.5%
1.24x
1.12x
1.00x
$3.48
$2.00
$3.59
4.8%
0.0%
2.6%
2.5%
1.24x
0.98x
1.07x
10.25x
10.81x
11.62x
10.89x
9.77x
11.54x
11.08x
10.80x
10.51x
9.84x
12.94x
11.09x
9.96x
11.31x
12.14x
11.14x
3.64x
4.09x
4.22x
3.98x
3.47x
4.37x
3.88x
3.91x
36%
38%
37%
37%
0.0%
5.4%
5.0%
7.8%
NM
4.5%
$0.93
$2.80
$2.13
$2.06
$1.62
0.0%
3.7%
4.0%
11.7%
NM
2.6%
1.10x
1.03x
1.01x
0.98x
1.07x
$0.93
$3.00
$2.22
$2.24
$1.90
0.0%
7.1%
4.2%
8.7%
17.3%
5.0%
1.12x
1.04x
1.19x
1.09x
1.07x
12.42x
11.40x
11.08x
13.20x
11.05x
12.03x
11.44x
11.32x
8.30x
10.65x
7.73x
10.43x
8.55x
15.02x
15.49x
16.97x
8.87x
14.01x
8.40x
13.95x
12.46x
14.20x
5.13x
12.25x
4.50x
4.25x
3.75x
4.15x
4.12x
4.16x
4.09x
4.22x
2.81x
3.35x
2.88x
3.62x
28%
40%
34%
31%
37%
33%
$2,835
$1,699
$2,080
8.1%
8.4%
3.1%
6.5%
$2.76
$2.41
$3.13
13.8%
13.0%
2.1%
9.7%
0.11x
1.52x
1.06x
$2.90
$2.57
$3.24
5.3%
6.9%
3.4%
5.2%
0.93x
1.60x
1.03x
11.50x
10.42x
14.86x
12.26x
7.65x
9.20x
14.31x
10.39x
619.38x
9.07x
13.41x
213.95x
10.36x
8.03x
13.41x
10.60x
3.50x
3.42x
4.04x
3.65x
2.33x
5.57x
3.89x
3.93x
30%
46%
27%
35%
$3,006
$55,361
$8,050
$85,379
$869
$7,417
$37,571
18.8%
8.9%
NM
11.0%
2.6%
27.9%
20.7%
15.0%
$0.53
$2.64
$1.21
$1.61
$2.18
$2.21
$1.44
10.4%
5.2%
NM
15.0%
3.3%
34.6%
20.1%
14.8%
1.02x
1.00x
1.01x
1.00x
0.99x
1.20x
NM
$0.68
$2.90
$1.38
$1.78
$2.18
$2.81
$1.75
28.3%
9.8%
NM
10.6%
0.0%
27.2%
21.5%
16.2%
1.15x
1.07x
1.12x
1.00x
1.00x
1.21x
NM
13.32x
53.63x
30.90x
15.84x
16.79x
12.07x
14.27x
22.40x
9.94x
39.93x
26.37x
15.01x
14.77x
9.44x
10.89x
18.05x
38.19x
24.58x
14.21x
22.81x
9.39x
27.46x
18.88x
22.22x
26.52x
20.47x
11.21x
20.66x
9.38x
21.39x
15.74x
17.91x
4.43x
21.18x
7.17x
5.23x
0.00x
4.44x
3.61x
6.58x
3.31x
15.77x
6.12x
4.96x
0.00x
3.47x
2.75x
5.20x
33%
39%
23%
37%
0%
37%
25%
28%
$2.08
$2.51
$4.38
$2.58
$2.40
$2.06
$2.29
$1.76
2014E
vs. '13
Growth
#
36
Raymond James
Company Citations
Company Name
Access Midstream Partners L.P.
American Midstream Partners L.P.
AmeriGas Partners L.P.
Anadarko Petroleum Corp.
Berry Petroleum Company
Boardwalk Pipeline Partners L.P.
BP
BreitBurn Energy Partners L.P.
Calumet Specialty Products Partners L.P.
Capital Product Partners L.P.
Chesapeake Energy Corp.
Chevron Corp.
Crosstex Energy Inc.
Crosstex Energy L.P.
Delek Logistics Partners L.P.
Delek US Holdings, Inc.
Eagle Rock Energy Partners L.P.
El Paso Pipeline Partners L.P.
Energy Transfer Equity L.P.
Energy Transfer Partners L.P.
Enterprise Products Partners L.P.
EV Energy Partners L.P.
Exterran Partners L.P.
Exxon Mobil Corp.
Ferrellgas Partners L.P.
Genesis Energy Partners L.P.
Global Partners L.P.
Golar LNG Partners L.P.
Hi-Crush Partners L.P.
Holly Energy Partners L.P.
Inergy L.P.
Kinder Morgan Energy Partners L.P.
Kinder Morgan, Inc.
KNOT Offshore Partners L.P.
Legacy Reserves L.P.
LINN Energy, LLC
LinnCo, LLC
LRR Energy L.P.
Magellan Midstream Partners L.P.
Martin Midstream Partners L.P.
Memorial Production Partners L.P.
Mid-Con Energy Partners L.P.
Niska Gas Storage Partners LLC
NuStar Energy L.P.
NuStar GP Holdings, LLC
Occidental Petroleum Corp.
Oiltanking Partners L.P.
PAA Natural Gas Storage L.P.
Pioneer Natural Resources Company
Pioneer Southwest Energy Partners L.P.
Plains All American Pipeline L.P.
QR Energy L.P.
Regency Energy Partners L.P.
U.S. Research
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EPB
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EXLP
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FGP
GEL
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GMLP
HCLP
HEP
NRGY
KMP
KMI
KNOP
LGCY
LINE
LNCO
LRE
MMP
MMLP
MEMP
MCEP
NKA
NS
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OXY
OILT
PNG
PXD
PSE
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Currency Closing Price RJ Rating
$
47.13
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21.59
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$
43.56
3
$
94.80
2
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43.32
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30.42
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£
440.10
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17.98
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30.71
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8.87
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26.90
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$
125.44
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$
20.85
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$
19.63
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$
30.55
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$
21.68
2
$
6.99
4
$
41.94
3
$
64.29
2
$
52.11
3
$
62.17
1
$
37.72
2
$
28.90
2
$
89.28
2
$
22.14
4
$
50.11
2
$
34.67
3
$
33.55
3
$
26.42
2
$
33.54
3
$
13.67
3
$
80.28
3
$
36.78
2
$
24.60
2
$
27.25
2
$
25.96
2
$
28.78
2
$
15.65
2
$
56.58
2
$
46.03
2
$
21.06
1
$
23.40
2
$
14.94
4
$
38.62
3
$
20.28
3
$
92.11
2
$
51.50
2
$
23.15
3
$
185.81
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$
43.65
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$
53.13
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RNO
RDSa.AS
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17.53
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31.17
73.97
50.60
43.65
32.83
58.92
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2
3
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2
2
2
2
2
2
2
2
2
2
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definitions. Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.
38
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U.S. Research
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The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell
any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such
information is accurate or complete. Persons within the Raymond James family of companies may have information that is not available
to the contributors of the information contained in this publication. Raymond James, including affiliates and employees, may execute
transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication.
Additional information is available on request.
Analyst Information
Registration of Non-U.S. Analysts: The analysts listed on the front of this report who are not employees of Raymond James & Associates,
Inc., are not registered/qualified as research analysts under FINRA rules, are not associated persons of Raymond James & Associates, Inc.,
and are not subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public companies,
and trading securities held by a research analyst account.
Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus
system. Several factors enter into the bonus determination including quality and performance of research product, the analyst's success
in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors
may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general
productivity and revenue generated in covered stocks. The covering analyst and/or research associate owns shares of the common
stock of Chevron Corp.
The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part
of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this research report. In addition, said analyst has not received compensation from any subject company in the last
12 months.
Ratings and Definitions
Raymond James & Associates (U.S.) definitions
Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months.
For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized
over the next 12 months.
Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more
conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative
safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months.
Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months.
Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.
39
Raymond James
U.S. Research
Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage
impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be
providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should
not be relied upon.
Raymond James Ltd. (Canada) definitions
Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index
over the next six months.
Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months.
Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and
is potentially a source of funds for more highly rated securities.
Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months
and should be sold.
Raymond James Latin American rating definitions
Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months.
Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months.
Market Perform (MP3) Expected to perform in line with the underlying country index.
Underperform (MU4) Expected to underperform the underlying country index.
Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage
providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should
not be relied upon.
Raymond James Euro Equities, SAS rating definitions
Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months.
Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months.
Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months.
Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months.
Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage
providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should
not be relied upon.
In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a
higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.
Rating Distributions
Coverage Universe Rating Distribution
Investment Banking Distribution
RJA
RJL
RJ LatAm
RJEE
RJA
RJL
RJ LatAm
RJEE
Strong Buy and Outperform (Buy)
51%
61%
43%
47%
25%
34%
0%
0%
Market Perform (Hold)
43%
39%
57%
32%
10%
23%
0%
0%
Underperform (Sell)
6%
0%
0%
21%
3%
0%
0%
0%
Suitability Categories (SR)
Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.
Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential
for long-term price appreciation.
Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings
and acceptable, but possibly more leveraged balance sheets.
High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues,
higher price volatility (beta), and risk of principal.
Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated
with success, and a substantial risk of principal.
40
Raymond James
U.S. Research
Raymond James Relationship Disclosures
Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the
next three months.
Company Name
Disclosure
Access Midstream
Partners L.P.
Limited Partnerships may generate Unrelated Business Taxable Income (UBTI), which can
create a tax liability that must be paid from a retirement account. You should receive a
Schedule K-1 from the partnership annually that would include UBTI and other financial
information. Please consult with your tax advisor to determine whether you must file and pay
tax from your account.
Raymond James & Associates co-managed a follow-on offering of ACMP shares within the past
12 months.
Raymond James & Associates co-managed an offering of debt for Access Midstream Partners
L.P. within the past 12 months.
Raymond James & Associates makes a market in shares of ACMP.
Raymond James & Associates received non-securities-related compensation from ACMP
within the past 12 months.
American Midstream
Partners L.P.
Raymond James & Associates received non-securities-related compensation from AMID within
the past 12 months.
AmeriGas Partners
L.P.
Boardwalk Pipeline
Partners L.P.
BreitBurn Energy
Partners L.P.
Raymond James & Associates co-managed a follow-on offering of BBEP shares within the past
12 months.
Raymond James & Associates makes a market in shares of BBEP.
Calumet Specialty
Products Partners L.P.
Raymond James & Associates makes a market in shares of CLMT.
41
Raymond James
U.S. Research
Company Name
Disclosure
Capital Product
Partners L.P.
Raymond James & Associates co-managed a follow-on offering of CPLP shares within the past
12 months.
Raymond James & Associates makes a market in shares of CPLP.
Raymond James & Associates or one of its affiliates owns more than 1% of the outstanding
shares of CPLP.
Chevron Corp.
Raymond James & Associates received non-investment banking securities-related
compensation from CVX within the past 12 months.
Crosstex Energy Inc.
Raymond James & Associates makes a market in shares of XTXI.
Crosstex Energy L.P.
Raymond James & Associates co-managed a follow-on offering of XTEX shares within the past
12 months.
Raymond James & Associates makes a market in shares of XTEX.
Delek Logistics
Partners L.P.
Raymond James & Associates co-managed an initial public offering of DKL shares within the
past 12 months.
Raymond James & Associates makes a market in shares of DKL.
Raymond James & Associates received non-securities-related compensation from DKL within
the past 12 months.
Delek US Holdings,
Inc.
Raymond James & Associates or one of its affiliates owns more than 1% of the outstanding
shares of DK.
Eagle Rock Energy
Partners L.P.
Raymond James & Associates makes a market in shares of EROC.
El Paso Pipeline
Partners L.P.
Energy Transfer Equity
L.P.
Raymond James & Associates received non-securities-related compensation from ETE within
the past 12 months.
42
Raymond James
U.S. Research
Company Name
Disclosure
Energy Transfer
Partners L.P.
Enterprise Products
Partners L.P.
Raymond James & Associates acted as an agent in an at-the-market offering of EPD shares
Raymond James & Associates co-managed a follow-on offering of EPD shares within the past
12 months.
Raymond James & Associates received non-securities-related compensation from EPD within
the past 12 months.
EV Energy Partners
L.P.
Raymond James & Associates makes a market in shares of EVEP.
compensation from EVEP within the past 12 months.
Exterran Partners L.P.
Raymond James & Associates co-managed an offering of debt for Exterran Partners L.P. within
the past 12 months.
Raymond James & Associates makes a market in shares of EXLP.
Raymond James & Associates received non-securities-related compensation from EXLP within
the past 12 months.
Ferrellgas Partners
L.P.
Genesis Energy
Partners L.P.
Raymond James & Associates co-managed a follow-on offering of GEL shares within the past
12 months.
Global Partners L.P.
Raymond James & Associates received non-securities-related compensation from GLP within
the past 12 months.
43
Raymond James
U.S. Research
Company Name
Disclosure
Golar LNG Partners
L.P.
Raymond James & Associates makes a market in shares of GMLP.
Hi-Crush Partners L.P.
Raymond James & Associates makes a market in shares of HCLP.
Holly Energy Partners
L.P.
Inergy L.P.
Raymond James & Associates makes a market in shares of NRGY.
Raymond James & Associates received non-securities-related compensation from NRGY within
the past 12 months.
Inergy Midstream L.P.
Raymond James & Associates co-managed a follow-on offering of NRGM shares within the
past 12 months.
Raymond James & Associates makes a market in shares of NRGM.
Kinder Morgan Energy
Partners L.P.
Raymond James & Associates received non-securities-related compensation from KMP within
the past 12 months.
KNOT Offshore
Partners L.P.
Raymond James & Associates co-managed an initial public offering of KNOP shares within the
past 12 months.
Raymond James & Associates makes a market in shares of KNOP.
Legacy Reserves L.P.
Raymond James & Associates lead-managed a follow-on offering of LGCY shares within the
past 12 months.
Raymond James & Associates makes a market in shares of LGCY.
LINN Energy, LLC
Raymond James & Associates makes a market in shares of LINE.
LinnCo, LLC
Raymond James & Associates lead-managed an initial public offering of LNCO shares within
the past 12 months.
Raymond James & Associates makes a market in shares of LNCO.
44
Raymond James
U.S. Research
Company Name
Disclosure
LRR Energy L.P.
Raymond James & Associates lead-managed a follow-on offering of LRE shares within the past
12 months.
Raymond James & Associates makes a market in shares of LRE.
compensation from LRE within the past 12 months.
Magellan Midstream
Partners L.P.
Martin Midstream
Partners L.P.
Raymond James & Associates co-managed an offering of debt for Martin Midstream Partners
L.P. within the past 12 months.
Raymond James & Associates makes a market in shares of MMLP.
Raymond James & Associates received non-securities-related compensation from MMLP
Memorial Production
Partners L.P.
Raymond James & Associates lead-managed a follow-on offering of MEMP shares within the
past 12 months.
Raymond James & Associates makes a market in shares of MEMP.
compensation from MEMP within the past 12 months.
Mid-Con Energy
Partners L.P.
Raymond James & Associates lead-managed a follow-on offering of MCEP shares within the
past 12 months.
Raymond James & Associates makes a market in shares of MCEP.
Niska Gas Storage
Partners LLC
45
Raymond James
U.S. Research
Company Name
Disclosure
NuStar Energy L.P.
Raymond James & Associates co-managed a follow-on offering of NS shares within the past 12
months.
Raymond James & Associates co-managed an offering of debt for NuStar Energy L.P. within
the past 12 months.
NuStar GP Holdings,
LLC
Oiltanking Partners
L.P.
PAA Natural Gas
Storage L.P.
Raymond James & Associates received non-securities-related compensation from PNG within
the past 12 months.
Pioneer Natural
Resources Company
Raymond James & Associates co-managed a follow-on offering of PXD shares within the past
12 months.
Pioneer Southwest
Energy Partners L.P.
Plains All American
Pipeline L.P.
compensation from PAA within the past 12 months.
Raymond James & Associates received non-securities-related compensation from PAA within
the past 12 months.
QR Energy L.P.
Raymond James & Associates lead-managed a follow-on offering of QRE shares within the past
12 months.
Regency Energy
Partners L.P.
Raymond James & Associates received non-securities-related compensation from RGP within
the past 12 months.
46
Raymond James
U.S. Research
Company Name
Disclosure
Rhino Resource
Partners L.P.
Raymond James & Associates lead-managed a follow-on offering of RNO shares within the
past 12 months.
Raymond James & Associates makes a market in shares of RNO.
Raymond James & Associates received non-securities-related compensation from RNO within
the past 12 months.
Southcross Energy
Partners L.P.
Raymond James & Associates co-managed an initial public offering of SXE shares within the
past 12 months.
Raymond James & Associates makes a market in shares of SXE.
Raymond James & Associates received non-securities-related compensation from SXE within
the past 12 months.
Spectra Energy
Partners L.P.
Suburban Propane
Partners L.P.
Raymond James & Associates lead-managed a follow-on offering of SPH shares within the past
12 months.
Raymond James & Associates received non-securities-related compensation from SPH within
the past 12 months.
Susser Holdings Corp.
Raymond James & Associates makes a market in shares of SUSS.
Raymond James & Associates received non-securities-related compensation from SUSS within
the past 12 months.
Susser Petroleum
Partners L.P.
Raymond James & Associates co-managed an initial public offering of SUSP shares within the
past 12 months.
Raymond James & Associates makes a market in shares of SUSP.
47
Raymond James
U.S. Research
Company Name
Disclosure
Targa Resources
Partners L.P.
Raymond James & Associates acted as an agent in an at-the-market offering of NGLS shares
Raymond James & Associates lead-managed a follow-on offering of NGLS shares within the
past 12 months.
Raymond James & Associates received non-securities-related compensation from NGLS within
the past 12 months.
Teekay LNG Partners
L.P.
Teekay Offshore
Partners L.P.
Raymond James & Associates co-managed a follow-on offering of TOO shares within the past
12 months.
Raymond James & Associates co-managed a follow-on offering of TLLP shares within the past
12 months.
Raymond James & Associates received non-securities-related compensation from TLLP within
the past 12 months.
The Williams
Companies, Inc.
Raymond James & Associates received non-securities-related compensation from WMB within
the past 12 months.
USA Compression
Partners L.P.
Raymond James & Associates co-managed an initial public offering of USAC shares within the
past 12 months.
Raymond James & Associates makes a market in shares of USAC.
Vanguard Natural
Resources, LLC
Raymond James & Associates co-managed a follow-on offering of VNR shares within the past
12 months.
Raymond James & Associates lead-managed a follow-on offering of VNR shares within the past
12 months.
Raymond James & Associates makes a market in shares of VNR.
48
Raymond James
U.S. Research
Company Name
Disclosure
Williams Partners L.P.
Raymond James & Associates co-managed a follow-on offering of WPZ shares within the past
12 months.
Raymond James & Associates makes a market in shares of WPZ.
Raymond James & Associates received non-securities-related compensation from WPZ within
the past 12 months.
Stock Charts, Target Prices, and Valuation Methodologies
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and
quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness;
competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on
overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have
target prices and thus valuation methodologies.
Risk Factors
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research:
(1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected
revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes
toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or
practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major
segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as
currency fluctuations, differing financial accounting standards, and possible political and economic instability.
Specific Investment Risks Related to the Industry or Issuer
Inability to Remove the General Partner
Each master limited partnership (excluding GP MLPs) will have a general partner that manages the operations, activities, and board of
directors through a 2% general partner interest. The general partner of a MLP will also have a 100% interest in the incentive distribution rights
and typically will own additional limited partnership interests. Given this level of control, removing the general partner or the individuals in
management is not likely. As a result, unitholders will have a limited voice in corporate governance.
Restriction of Ownership
For partnerships with inter-state, FERC-regulated assets, Federal Energy Regulatory Commission regulations restrict ownership of partnership
units to U.S. taxpayers.
Risks - Energy
1. Commodity price Risk – Cash flows are directly or indirectly impacted by fluctuations in commodity prices and foreign exchange rates, most
notably the Canadian-US dollar.
2. Operational Risk – Production from oil & gas properties could be impacted by unforeseen events - weather-related disruptions, downtime
at processing facilities and unexpected pipeline breaks could all have an impact on a company’s financial and operating results.
3. Exploration and Development Risk – There is no guarantee that the exploration spending will result in economically viable discoveries;
production and reserves can be materially impacted by lower than expected well productivity, weather conditions and construction delays
could also impact production. Failure of development programs to deliver targeted reserves and production could also impact a company’s
financial and operating results; this includes the potential for dry holes, unexpected production delays and higher than expected decline rates.
4. Regulatory Risks – The operations of an oil & gas company could also be materially impacted by regulatory changes; this includes but is not
limited to changes in provincial royalty rates.
5. Environmental risks – Oil & gas companies are exposed to capital and operating costs associated with meeting environmental laws and
regulations; this includes remediation expenditures; changes in the associated laws and/or regulations could have a material impact on a
company’s financial and operating results.
6. Financial Risk – The oil & gas business is capital-intensive, which increases a company’s reliance on external sources of financing. Significant
changes in the outlook for a company could impact its ability to fund capital program from cash flow and/or secure debt and/or equity
financing. Lower cash flow could force a company to sell assets or reduce dividends if applicable to repay debt and other financial obligations.
49
Raymond James
U.S. Research
For companies with debt, a significant increase in interest rates could have a negative impact on cash flow. Oil & Gas companies are also
exposed to potential changes in federal and provincial income taxes, which could have a material impact on cash flow.
7. Acquisitions – Some oil & gas companies have historically relied on acquisitions to maintain per unit production, reserves and
dividends/distributions. Should the availability and quality of acquisitions be limited, the quality of the reserves and production of a trust may
be negatively affected. This could have a negative impact on dividends/distributions if applicable to shareholders.
8. Political risk – International Oil & Gas companies may face inherent political risks when operating in unstable jurisdictions. Unexpected
actions taken by such regimes or other recognized or non-recognized entities or parties could negatively affect the production, development,
and/or operation of these companies.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability
categories, is available at rjcapitalmarkets.com/Disclosures/index. Copies of research or Raymond James’ summary policies relating to
research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services
office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written
request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL
33716.
For clients in the United Kingdom:
For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document
and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons
who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment
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(Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended
to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is
therefore not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and
is not intended for use by clients.
For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of
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Authority in the United Kingdom.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed,
being persons who are Eligible Counterparties or Professional Clients as described in “Code Monétaire et Financier” and Règlement
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classified as Retail Clients.
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submitted.
Raymond James International and Raymond James Euro Equities are authorized by the Autorité de Contrôle Prudentiel in France and
regulated by the Autorité de Contrôle Prudentiel and the Autorité des Marchés Financiers.
For Canadian clients:
This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the
report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements.
Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows:
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by
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This is RJA client
releasable research
This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret or other
intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and
criminal penalties for copyright infringement.
50

Monthly Master Limited Partnership Overview

Transcription

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