Once commonplace, MLP overnight follow-on equity deals fell off dramatically over the past few years, as did MLP IPOs. Partially, management teams believed the market was undervaluing their company. Partially, the macro energy environment decreased the need for more midstream projects, thus delaying the need for MLP financing.
With many recent project announcements, deals are picking up, but investors remain cautious—pricing capital market deals according to their perceived merit. For debt issuances, the lower the rate, the better for the MLP. For equity, the lower the discount, the better for the MLP.
And of course, when investors demand more than the MLP was originally planning to sell, the upsized offering is also a positive sign.
NGL Energy Partners LP issued both equity and debt this past February. The debt offering was sold at 6.125% and was upsized to $500 million from $450 million. For comparison, NGL’s last debt offering—also upsized—in October 2016, at a similar term length, priced at 7.5%. NGL’s recent equity offering was upsized by 10% and was sold at a 7% discount. The last equity offering in March 2015 sold at only a 4.9% discount. Each deal was done following a period of relative stability.
In early 2015, investors were concerned about the pullback, but panic had not yet taken hold, and in late 2016, the markets had not yet gained enough confidence to stop panicking.
In March of this year, Plains GP Holdings sold $1.5 billion of equity. The deal was upsized over 20%, sold at only a small discount, 2.4%, and will be used to buy units of Plains All American since Plains GP is the C corp tracker stock. Clearly, such a large offering at such a small discount indicates pent-up demand for Plains equity, and investors’ belief that risk is already appropriately priced.
Rounding out the recent issuers, Tesoro Logistics financed its new asset purchases with an equity offering following a six-month, 15% return. By taking advantage of higher unit prices, the MLP was able to issue fewer units while still paying down the debt used for its asset purchases.
April saw the first MLP IPO of the year: Hess Midstream Partners LP. Pricing above expectations, and upsized, this brand new MLP is still majority owned by sponsor Hess Corp. and private equity firm Global Infrastructure Partners.
While no one has a crystal ball, MLP management teams have shown that they are comfortable issuing equity at these unit prices, and investors have begun to show an increasing appetite for capital markets deals.
Maria Halmo is the director of research at Alerian, an independent provider of MLP and energy infrastructure market intelligence. Over $17 billion is directly tied to the Alerian Index Series. For additional commentary and research, please visit www.alerian.com/alerian-insights.