IPO Report: Midcoast Energy Partners, LP (MEP)

Francis Gaskins |

Midcoast Energy Partners, LP (MEP) is a spin-off of a spin-off, see ‘organizational structure below’.  MEP a pure-play U.S. natural gas and NGL midstream business.

12 other IPOs scheduled for this week.  The full IPO calendar can be found at IPOpremium.

MEP scheduled a $370 million IPO on the NYSE with a market capitalization of $923 million at a price range midpoint of $20 for Thursday, November 7, 2013.

The S-1 with price ranges was filed October 31, 2013.  The Manager, Joint managers are BofA Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley, Wells Fargo Securities, UBS Investment Bank

Overview

MEP intends to pay a 6.5% dividend at the price range mid-point of $20, with a 20% cashflow overage for the six months ended June 30 ’13. 

Recent Developments

For the three months ended September 30, 2013 MEP estimates a net loss of between $7.9 million and $17.9 million, compared with net income of $28.7 million for the three months ended September 30, 2012 – not good.

Adjusted EBITDA for the three months ended September 30, 2013 is expected to be between $51.0 million and $61.0 million, compared with $88.9 million for the three months ended September 30, 2012 – not good.

Conclusion

Avoid MEP at the price range mid-point of $20, based on their estimated loss for the September quarter.  The loss estimate range is so wide for a quarter that ended over a month ago, that MEP’s future projections at  this point are suspect, and there may be something wrong with their accounting systems.

Business

MEP is a spin-off of a spin-off:  it’s a pure-play U.S. natural gas and NGL midstream business.

Organizational structure

MEP is a growth-oriented Delaware limited partnership recently formed by Enbridge Energy Partners, L.P. (EEP) $9.1 billion market cap, to serve as EEP’s primary vehicle for owning and growing its natural gas and natural gas liquids, or NGL, midstream business in the United States.

EEP itself is owned by Enbridge Inc. (ENB) , with a $36 billion market cap. 

Enbridge Energy Management LLC (EEQ) with a $1.8 billion market cap has 100% voting interest in the top line parent, ENB.

MEP is on a confusing organization chart.  See it here.

See combined NGL price chart here

Notice that priced have picked up since June

June 30 ’13 qtr results down compared to June 30 ’12 qtr

The segment gross margin of MEP’s gathering, processing and transportation business for the three months ended June 30, 2013 decreased $54.6 million from the segment gross margin for the three months ended June 30, 2012, primarily as a result of changes in NGL prices.

For the three months ended June 30, 2013, the prevailing price for NGLs decreased 13% per composite barrel at the Mont Belvieu pricing hub, while increasing 7% per composite barrel at the Conway pricing hub, in each case as compared with the prevailing composite barrel prices for the three months ended June 30, 2012.

Recent shifts in supply and demand fundamentals for NGLs, particularly ethane and propane, have resulted in downward pressure on current and forward NGL prices.

Average daily natural gas volumes on our systems for the three months ended June 30, 2013 decreased by approximately 158,000 MMBtu/d, or 5.9%, compared with the three months ended June 30, 2012, primarily due to reduced drilling around the Anadarko system and within the dry gas areas of our East Texas system.

Due to low ethane prices during the three months ended June 30, 2013, it was more profitable to operate some of the processing plants within the Anadarko system in ethane rejection mode, which results in lower NGL volumes since the ethane is sold as part of the natural gas stream.

Midcoast Operating
MEP’s initial assets consist of a 39% controlling interest in Midcoast Operating, a Texas limited partnership that owns a network of natural gas and NGL gathering and transportation systems, natural gas processing and treating facilities and NGL fractionation facilities primarily located in Texas and Oklahoma.  EEP has retained a 61% non-controlling interest in Midcoast Operating.

Midcoast Operating also owns and operates natural gas, condensate and NGL logistics and marketing assets that primarily support its gathering, processing and transportation business. Through MEP’s ownership of Midcoast Operating’s general partner, it controls, manages and operates these systems.

MEP’s business primarily consists of gathering unprocessed and untreated natural gas from wellhead locations and other receipt points on its systems, processing the natural gas to remove NGLs and impurities at its processing and treating facilities and transporting the processed natural gas and NGLs to intrastate and interstate pipelines for transportation to various customers and market outlets. In addition, MEP also markets natural gas and NGLs to wholesale customers.

MEP is able to provide its customers with integrated wellhead-to-market service from its systems to major energy market hubs in the Gulf Coast and Mid-Continent regions of the United States. From these market hubs, natural gas and NGLs are either consumed in local markets or transported to consumers in the Midwest, Northeast and Southeast United States.

Competition
Natural Gas Supply.MEP’s Anadarko system includes production from the Granite Wash tight sand formation. MEP’s principal competitors in the Anadarko basin are DCP Midstream, LLC, Enogex LLC, Eagle Rock Energy Partners, L.P., PVR Partners, L.P. and MarkWest Energy Partners, L.P., or MarkWest.

Natural Gas Supply.MEP’s East Texas system gathers production from the Cotton Valley Lime and lean Bossier Shale plays, which are located on the western side of our East Texas system; the Haynesville/Bossier Shale plays, which run from western Louisiana into East Texas and are among the largest natural gas resources in the United States; and the Cotton Valley Sand formation, which also runs from western Louisiana into East Texas and has a high content of NGLs and condensate on the eastern side of our East Texas system. MEP’s principal competitors in the East Texas basin are DCP Midstream, LLC, Enterprise Products Partners L.P. (“Enterprise Products Partners”), MarkWest, CenterPoint Energy, Inc. and Tenaska.

Natural Gas Supply. A substantial portion of natural gas on MEP’s North Texas system is produced in the Barnett Shale play within the Fort Worth basin. MEP’s principal competitors in the North Texas basin are Targa Resources Partners, LP (“Targa Resources Partners”), Crosstex Energy LP, Energy Transfer Partners, L.P. (“Energy Transfer Partners”) and DCP Midstream, LLC.

MEP’s logistics and marketing business has numerous competitors, including large natural gas and NGL marketing companies, marketing affiliates of pipelines, major oil, natural gas and NGL producers, other trucking, railcar and pipeline operations, independent aggregators and regional marketing companies. MEP’s logistics and marketing business’ principal competitors include numerous natural gas and NGL marketing companies such as Energy Transfer Partners, Enterprise Products Partners, ONEOK, Targa Resources Partners and DCP Midstream, LLC and major integrated oil and natural gas companies.

Seasonality

Generally, the demand for natural gas and NGLs decreases during the spring and fall months and increases during the winter months and in some areas during the summer months. Seasonal anomalies such as mild winters or hot summers can lessen or intensify this fluctuation.

Demand for natural gas with respect to power plant and utility customers is typically driven by weather-related factors.

5% stockholders

100% owned pre-IPO byEnbridge Energy Partners, L.P. (EEP) $9.1 billion market cap, see ‘organizational structure’ above.

Dividend policy

Post IPO, MEP’s partnership agreement will provide for a minimum quarterly distribution of $0.3125 per unit for each whole quarter, or $1.25 per unit on an annualized basis, which is a 6.25% return.

Use of proceeds

MEP expects to net $342.5 million from its IPO.  Proceeds are allocated as follows:

$339.1 million will be distributed to EEP;

$3.4 million will be used to pay revolving credit facility origination and commitment fees.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ENB Enbridge Inc 42.27 0.12 0.28 1,381,729
MEP Midcoast Energy Partners L.P. representing limited 6.85 0.20 3.01 153,784
EEQ Enbridge Energy Management LLC Shares repstg limit 24.28 0.12 0.50 78,150
KKPNY Koninklijke KPN NV ADR (Sponsored) 2.89 0.00 0.00 367,430

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