Going Public: More MLPs for Your Consideration

Thus far in 2012, six master limited partnerships (MLP) have gone public to varying degrees of success. Two of these fledgling publicly traded partnerships operate in the financial sector, while the other four own and operate energy-related assets.

Source: Bloomberg

Five of these six stocks have posted a gain since their IPOs, but time will be the true test: This security class has traditionally been the province of income-seeking retail investors who favor a buy-and-hold strategy.

Within this space, the market tends to reward distribution sustainability and growth while punishing names that fail to increase their quarterly disbursement or, even worse, slash this payout. The jury is out on the class of 2012 until these names have a few more quarters under their belts.

The number of MLPs that have gone public thus far in 2012 is somewhat off the pace from previous years, though the pipeline of prospective IPOs remains strong.

Source: Bloomberg

But an equally important story is the growing diversity of the MLP universe.

Of the 22 partnerships that have filed S-1 statements since June 2011, Northern Tier Energy LP (NYSE: NTI), PetroLogistics LP (NYSE: PDH) and Alon USA Partners LP (NYSE: ALDW) have significant exposure to commodity prices and don’t set a minimum quarterly distribution.

In 2011 CVR Partners LP (NYSE: UAN) and Rentech Nitrogen Partners LP (NYSE: RNF) went public and, thus far, have generated solid returns for investors, though their distributable cash flow also ebbs and flows with the prospects of the global fertilizer industry.

These variable-distribution MLPs mark a departure from the traditional MLP model, which strives for consistent cash flow and a sustainable quarterly payout. Even upstream partnerships that produce oil, natural gas and natural gas liquids tend to hedge aggressively and often target a higher distribution coverage ratio to buffer against fluctuations in commodity prices.

Prior to 2011, Terra Nitrogen Partners LP (NYSE: TNH) and Dorchester Minerals LP (NSDQ: DMLP) were the lone variable-distribution MLPs available to investors. If Alon USA Partners goes public, the ranks of these unconventional MLPs will have swelled to seven.

The range of businesses that have embraced the partnership structure also continues to grow, with Hi-Crush Partners LP (NYSE: HCLP) becoming the first MLP to specialize in sand for hydraulic fracturing and Northern Tier Energy becoming the first MLP to own an interest in a bakery.

We expect this trend to continue apace, as companies seek to feed income-seeking investors’ appetites for fare that offers an above-average yield. Accordingly, the pipeline of prospective publicly traded partnerships remains robust.

Source: Bloomberg, Securities and Exchange Commission

Three partnerships have filed S-1 forms with the Securities and Exchange Commission (SEC) since we last wrote about MLP IPOs.

SunCoke Energy (NYSE: SXC) hasn’t disguised its plan to restructure the company as an MLP since the management team disclosed this possibility during a conference call to discuss results from the fourth quarter of 2011.

This plan moved closer to fruition after SunCoke Energy’s parent, downstream operator Sunoco (NYSE: SUN), in January 2012 divested its 81 percent interest in the company via a special dividend to shareholders, setting the table for the creation of SunCoke Energy Partners LP (NYSE: SXCP) and an S-1 filing with the SEC.

If everything goes according to plan, SunCoke Energy Partners would become the first MLP to produce coke, a solid-carbon fuel that steelmakers use in their blast furnaces.

After the IPO, the firm will acquire a 60 percent interest in its sponsor’s Haverhill and Middletown coke-making facilities, which include 300 ovens and boast a total productive capacity of 1.7 million tons per year. Two customers purchase the majority of this output under long-term, take-or-pay contracts: AK Steel Holding Corp (NYSE: AKS) and ArcelorMittal (Amsterdam: MT, NYSE: MT), though the former accounts for about two-thirds of sales from these facilities.

These contracts include terms that allow SunCoke Energy Partners to pass through coal-procurement costs and many other expenses through to the customer, while SunCoke Energy has pledged to purchase any dedicated volumes that go unsold if a customer defaults or exercises the termination clause in its contract. This guarantee should help to alleviate investors’ concerns about SunCoke Energy Partners’ exposure to AK Steel, which suspended its dividend in the second quarter and continues to struggle under a considerable debt burden.

Although the aforementioned long-term contracts should enable SunCoke Energy Partners to ride out a challenging period for domestic steel manufacturers, much of the firm’s growth potential will likely come from drop-down transactions from its sponsor, the largest independent coke producer in the Americas.

Summit Midstream Partners LP (NYSE: SMLP), which filed its S-1 registration statement with the SEC on Aug. 21, 2012, owns two gathering systems, or small-diameter pipelines and compression stations that transport hydrocarbons from the field to a larger pipeline for shipment to a processing plant.  

Formed by private-equity outfit Energy Capital Partners in 2009, the prospective publicly traded partnership acquired 17 miles of gathering pipelines and compression capacity of 2,500 horsepower in the Barnett Shale, a gas-producing play in and around Fort Worth, Texas. The firm has since added 92 miles of gathering pipelines and 47,600 horsepower of compression.

In October 2011, Summit Midstream Partners acquired 276 miles of pipeline and 97,500 horsepower of compression that serve the Piceance Basin in western Colorado.

In the first half of 2012, the company’s gathering pipelines transmitted an average of 909 million cubic feet of natural gas per day, about 64 percent of which contained natural gas liquids.

Although customers have reserved much of this capacity under fee-based agreements, the company has some exposure to slowing drilling activity in gas-focused plays: Depressed natural gas prices have prompted producers to curtail development in parts of the Barnett Shale, which would limit new well connections.

The company continues to build a mid-pressure gathering system and other midstream infrastructure to support EnCana Corp’s (TSX: ECA, NYSE: ECA) operations in Colorado’s Niobrara Shale, an endeavor that should lead to incremental cash flow growth.

Summit Midstream Partners’ S-1 form also indicates that the company is eyeing opportunities to diversify its asset base by acquiring assets and establishing relationships with producers in other basins.

A spin-off of independent refiner Alon USA Energy (NYSE: ALJ), Alon USA Partners filed its S-1 registration statement on Aug. 31, 2012, making the firm the sixth downstream operator looking to go public as an MLP since June 2011.

The aspiring publicly traded partnership owns and operates a refinery in Big Spring, Texas, that boasts a nameplate capacity of 70,000 barrels per day and has the flexibility to process sour crude oils. These varietals often trade at a discount to light, sweet crude oils, a distinct advantage when feedstock prices rise.

Management touts the refinery’s strategic location, which enables the firm to take advantage of the price differential between West Texas Intermediate (WTI) crude oil and Brent crude oil, a product of rising domestic oil production and local capacity constraints, especially at the hub in Cushing, Okla.

In the current environment, midcontinent refiners such as Alon USA Partners are able to purchase WTI crude oil at favorable prices and sell their output at elevated prices that reflect the market value of Brent crude oil.

Meanwhile, the proximity of Alon USA Partners’ assets to the delivery hub in Midland, Texas, ensures that the firm incurs lower transportation costs on its WTI and West Texas Sour crude oil than Gulf Coast operators that source their inputs from Cushing.  

In the first half of 2011, Alon USA Partners’ wholesale distribution network markets almost 20 percent of its motor gasoline to its sponsor’s 7-Eleven convenient stores in Texas, Oklahoma, New Mexico and Arizona. In the first six months of 2012, Alon USA Energy purchased almost 20 percent of the motor gasoline produced by the Big Spring refinery and all of its asphalt output. The MLP will enter 20-year agreements to supply fuel and asphalt to its sponsor.

Alon USA Energy will use its proceeds from the IPO to reduce its considerable debt load, which, at the end of the second quarter, stood at 67 percent of the firm’s capital.

Investors contemplating a position in Alon USA Partners should note that the firm will pay out all of its cash flow as a distribution that will vary from quarter to quarter.