Noble IPO Tests Market for Once-Hot MLPs

An energy-infrastructure company this week will test whether a once-hot investment on Wall Street is poised for a rebound in the IPO market.

Noble Midstream Partners LP, a master-limited partnership, is aiming to raise up to $263 million in a U.S. initial public offering late Wednesday, according to people familiar with the offering, in what would be the first IPO of an MLP in more than a year.

MLPs, which earn their money through long-term contracts charging oil-and-gas producers to transport or store their products, proliferated over the last decade during the U.S. energy boom. They attracted investors with steady payouts that offered tax advantages and income during a time of ultralow interest rates.

Between 2010 and 2014, investors poured a net $44 billion into energy pipeline and storage funds, according to Morningstar Inc. In 2014, MLP IPOs raised roughly $7.3 billion.

But that changed last year with sharp declines in the price of crude oil. Investors began to worry that distressed producers would slide into bankruptcy, and that judges might allow them to break free of contracts that bring MLPs stable fees for pipeline partnerships.

This is Noble Midstream's second attempt to go public. Last November, management launched its roadshow for investors, but ultimately withdrew the offering because of unfavorable market conditions, the company said at the time. It is looking to sell 12.5 million shares at between $19 and $21 apiece, according to a regulatory filing.

"If the deal goes well it certainly will show that the healing has begun and investors are looking at this asset class from a different lens than they were six months ago," said Chris Eades, portfolio manager for several MLP strategies at ClearBridge Investments, who is considering the Noble Midstream IPO.

While he said he doesn't expect the floodgates to open for new MLP offerings, a successful stock-market debut should signal to MLP management teams that if they need to raise equity they can, something that "is in striking contrast to the beginning of the year."

Net flows into MLP mutual funds and exchange-traded funds fell to $3.5 billion in 2015, down 78% from a year prior, according to Morningstar. The Alerian MLP Index, a benchmark of pipeline and transportation companies, tumbled 37% in 2015, outpacing the 30% decline in the price of U.S.-traded crude oil over that period.

The Alerian index is doing better this year as oil prices have stabilized. The index is up 3.4% in 2016 as of Tuesday's close. Through the end of August, $3.8 billion has flowed into MLP funds, according to Morningstar.

Access to capital markets has also improved for MLPs. Between August 2015 and February 2016, 10 already-public MLPs raised about $1.8 billion in stock sales, according to Dealogic. Between May and September, 19 MLPs have raised $3.9 billion in stock sales.

Some MLPs have tried to reassure investors that their balance sheets are strong enough to withstand persistently low energy prices.

Plains All American Pipeline LP, for example, announced moves in July aimed at conserving cash. The company cut its quarterly payout by 21% and simplified its structure to do away with special payments it had been making to its parent company. Plains shares are up 18% this year so far through Tuesday.

If oil prices reach $50 to $60 a barrel, that could be enough to spur U.S. producers to increase output, said Greg Reid, president of the MLP complex at Salient Partners.

"It won't go back to the heyday of high growth, but we're in a more mature industry now," Mr. Reid said.

Some investors looking at the Noble deal said they liked that it was backed by a parent, which could provide a steady stream of new assets. Noble Midstream is backed by Noble Energy Inc., an oil and natural gas producer.

Barclays PLC, Baird and J.P. Morgan Chase & Co. are leading Noble's offering, and shares are set to start trading on the New York Stock Exchange under the symbol NBLX on Thursday.

David Ronn, a lawyer at Orrick, Herrington & Sutcliffe, said there is pent-up demand for access to capital from existing MLPs that have been shut out of debt and equity markets and some may be waiting in the wings to go public. Still, he said few expect a return to the "raucous market" of 2013 and 2014, when oil prices were closer to $100 a barrel—a price that spurred the energy infrastructure build out and the proliferation of MLPs.

"For the healthy MLPs, there's been a market overreaction, and they want to be able to access the capital markets from a reasonable perspective," he said. "Will there be greater scrutiny? Of course there will."

Write to Corrie Driebusch at [e-mail] and Alison Sider at [e-mail]

(END) Dow Jones Newswires

September 14, 2016 15:45 ET (19:45 GMT)

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