MLP IPO Activity Heats Up

In December 2011, the Alerian MLP Infrastructure Index (AMZI) gained 6.1% on a total return basis, compared to the S&P 500 return of 1% and the 10-year treasury notes’ decrease from 2.1% at the end of November to 1.9% at the end of December.

The initial-public-offer (IPO) market roared back to life, with two midstream and two exploration and production (E&P) IPOs in December, for a total of 13 master limited partnership (MLP) IPOs in 2011.

On December 9, Memorial Production Partners LP (MEMP) raised $171 million by offering nine million shares at $19. This came at the low end of the range, as originally 10 million shares were to be offered at $19 to $21 each. MEMP is an E&P MLP, operating gas reserves in south and east Texas. At the end of December, MEMP was still trading below the initial offering price.

Also on December 9, Rose Rock Midstream LP (RRMS) raised $140 million by offering 7 million shares at $20. RRMS was formed by SemGroup Corp. as a midstream MLP, owning crude oil gathering, transportation, storage and marketing assets in the Midwest. Although RRMS opened below the offering price, it was trading at $20.50 less than a month after its IPO.

The following week, on December 15, Mid-Con Energy Partners LP (MCEP) raised $97 million, offering 5.7 million shares at $18, below the initial range of $19 to $21 each. As an E&P, MCEP uses waterflooding to increase production of their oil and natural gas properties in the Midcontinent.

During the first two weeks of trading, MCEP consistently traded above the offering price, but as of the end of December, not above $19. The final MLP IPO in 2011 was Inergy Midstream LP (NRGM) on December 16. Inergy LP (NRGY), the parent, spun off most of their midstream assets. NRGM was formed as a natural gas and gas liquids storage and transportation business in the Northeast to take advantage both of the New York City energy demand and the build-out of the Marcellus shale. The Tres Palacios storage facility in Texas and all propane assets remain at the parent level. The deal raised $272 million, offering 16 million shares at $17, also below the original range of $19 to $21. In the initial trading period, NRGM traded at more than $18 and ended the year just shy of $19.

In secondary transactions, Enterprise Products Partners LP (EPD) raised about $390 million from sale of their own units, as well as some $825 million from the sale of Energy Transfer Equity (ETE) units. Also, NuStar Energy LP (NS) raised $312 million through its sale of units.

Meanwhile, on the heels of several highly publicized pipeline accidents in 2010 and 2011, the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (HR 2845) was signed into law by President Obama on January 3, 2012. The legislation involves greater oversight and inspections of pipelines and increases maximum fines for violations.

Interestingly, the Association of Oil Pipelines, Interstate Natural Gas Association of America, and American Gas Association endorsed the measure. And industry analysts do not expect the bill to have a material impact on MLP cash flows.

Elsewhere, Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) have agreed to reverse the direction of the Seaway pipeline, enabling crude oil to flow from Cushing, Oklahoma, to the Gulf Coast. Open season is underway, and the pipeline could be in operation by second-quarter 2012. With an initial capacity of 150,000 barrels (bbl.) per day, Seaway would ease the bottleneck at Cushing and potentially reduce the West Texas Intermediate-Brent spread.

Previously, EPD had planned to build the Wrangler pipeline, which would have moved 800,000 bbl. per day of crude from Cushing to the Gulf Coast. The Wrangler pipeline was cancelled. Yet, if enough interest is shown during the open season for Seaway, EPD may undertake a future project to add a line parallel to Seaway.

Overall, during 2011, MLPs found great traction in the broad investment community. Even as investors seemed to prefer the larger, more well-established MLPs, the recent offerings have found willing markets.

Oneok Partners LP was the top performer in the AMZI during 2011, gaining 45.3%.