Oil and gas MLPs facing difficulties raising PIPEs - analysis11 December 2007

In the past year and a half, oil and gas exploration and production master limited partnerships, or E&P MLPs, have largely relied on PIPEs to quickly access capital and jump on acquisition opportunities. That market appears to have dried up for the short term, and firms are looking to shelf registrations as one alternative, industry sources said.
A PIPE, or private investment in public equity, is a private investment firm’s purchase of stock in a company at a discount to market value, and typically allows the company to avoid time-consuming regulatory filings with the SEC.
In one of the largest PIPE financings on record, Linn Energy raised USD 1.5bn through a private placement led by Lehman Brothers MLP Opportunity Fund, which was applied to Linn’s USD 2.05bn purchase of assets from Dominion Resources in July.
But since July, after the credit troubles hit the market, some investment firms have become squeamish about providing PIPEs to oil and gas MLPs, according to panelists at a recent Platts Oil & Gas Acquisition and Divestiture conference in Houston.
“Dreams of easy money have disappeared,” Ed Guay, a partner at Tudor, Pickering & Co, told this news service. After an enormous ramp-up in PIPE activity, at the end of July there was almost a "full stop" in PIPE financing, said Jeff Wood, VP of Private Equity at Lehman Brothers MLP Opportunity Fund.
An industry banker added, “It would be very difficult to finance anything in the PIPE market right now without a tremendous discount.”
According to John Walker, CEO of EV Energy Partners, MLPs' stocks have declined from 15% to 30% since July, largely because the vehicles are dependent on external capital. Because of the credit crunch, there was an assumption in the market that capital was not available, he said.
A source at a MLP fund explained that another cause for hesitation is that there are a number of new E&P MLPs set to go public, and when those units start trading, investors will want to sell their existing units in MLPs in order to buy the new ones.
A third problem, according to Jerry Swank, president of Swank Capital, is that E&P MLPs are not very liquid. When the “nuclear bomb went off in the credit markets,” he said, it prompted a sell off in the MLP market. Quant funds needed to liquidate and sold assets at a high, and several sources said those funds are not expected to return.
As a result of the shaky market, today a USD 1.5bn PIPE may not be available, but Walker of EV Energy Partners said it was his belief that USD 100m or USD 200m deals can still get done, albeit at a higher discount rate.
The source at the MLP fund said that six months ago his fund would have done a PIPE for a 5% to 7% discount to market value, but today it would ask for about a 10% to 14% discount to compensate for the added risk.
As an alternative to PIPEs, Randy Breitenbach, CEO of BreitBurn Energy, said many firms are filing shelf registrations instead. Unlike a PIPE, which provides fast capital, a shelf registration requires registering with the SEC for a stock offering at some point in the future. This allows a company to go to market quickly when conditions become more favorable.
As for the investment firms, Donald Kendall, MD of Kenmont Investments Management, said MLP funds will continue to finance PIPEs, but will be more selective about the deals they support. “A lot of deals just don’t fit the MLP structure,” Kendall said. There is more risk involved with an E&P MLP because it is sensitive to commodity prices, he said, but "good deals can still get done.”

by Heather West

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