MLP HINDSight

Remember when people used to use cassette tapes? Remember how boomboxes had two cassette slots that would allow you to record one tape’s contents onto another tape?  Remember how each tape copy was worse quality than the original, even when your boom box had fancy words strung together like “high speed dubbing”?  This week’s MLP price action felt like last a crappy copy of last week.  Similar, but worse.

Today was the worst single day drop for the MLP Index since September 22, 2011, and this week was the worst weekly price change since first week of August 2011 when MLP Index was down 6.2%.  The chart below shows this week’s price action for the Index and the S&P 500.  Correlation looks pretty strong, which is a phenomenon I’ve written about before (like here), how MLPs are uncorrelated with stocks over long time periods, but short term market volatility has had an increasingly correlated effect on MLPs as vehicles for MLP investment (funds) have multiplied.  The theory being that funds have simpler tax consequences upon sale, so its easier to jump in and out of MLPs via funds than ever before.

This week’s 5.3% drop was the worst week of the year so far for the Alerian MLP Index.  It was also the 12th worst week in the last 10 years, in terms of total return.  Taking out the extreme volatility of late 2008 and early 2009, this week would have cracked the top 5.  And there weren’t even any equity offerings or ex-dates this week…so, not great.  Good news is that usually the index bounces back the following week, but when it doesn’t its usually very ugly.   Other silver lining is the index usually bounces back faster and higher than the broader market (as in 2009, and late 2011).

I read somewhere (and am too lazy to find the reference or substantiate what I’m about to write with back up) that investors in the U.S. have been pulling money out of equities and that this year’s strength for stocks was the result of fund inflows from foreign investors.  That would explain why MLPs have struggled relative to stocks year to date, given that MLPs are pretty difficult for international investors to invest in, unless its through ETFs or other funds.  But who cares now, because no one is buying U.S. stocks since May started…

Winners & Losers

Only 4 MLPs had positive weeks, and CPNO and RNO had their 2nd straight weeks with a double digit percent drop…note the chart below excludes the 5 variable distribution MLPs.

MLP Index dropped 5.3% this week, roughly inline with oil and with the S&P 500.  Variable distribution MLPs were crushed, in particular TNH (-14.4%) and recently IPOed PDH (-11.2%).  XTXI led the GPs lower with a 14.4% decline, ETE (-9.7%) not much better.  Somehow, amid all of this risking off, natural gas had another very sharp uptick in price week over week (+9.2%) on hopes of warmer than average weather this summer.

Year to Date

The gap between the year to date winners and losers narrowed a bit this week.

MLPs on a price basis are underperforming year to date, and even with distributions included, the gap is wide.

So, where do we go from here?  Seems like we’re headed back into high correlation, binary outcome stock market performance for a while with all eyes on Europe again… I may be wrong, but it doesn’t seem like the cash being withdrawn in Greece is going to find its way into U.S. stocks or into MLPs for the time being.  Its too bad that the global equity markets have become so dependent on central bank stimulus to feed the beast.

Maybe Zuckerberg will take his $1.15 billion in Facebook IPO proceeds and invest it in MLPs (or better yet, hire me to do so)…except that he has to pay $900+ million in taxes as a result of this liquidity event, so not much left over for MLP stimulus…wow.

I won’t be wrapping the news this week, too much work to do preparing for a cross country move the day after next week’s NAPTP conference.  Not much happened in terms of MLP news this week anyway, KMI/EP announced drop down to EPB (equity deal coming), MEMP did a small acquisition, RGP and EEP announced expansions, and KMI is replacing EP in the S&P 500 (and dropped out of the MLP conference).  Here is the usual chart I put in that post, and a few other ugly charts highlighting the worst of the worst MLP price action since the beginning of May.

CPNO Since May 1

RNO Since May 1

All around ugly week for the MLP sector…

As they used to say at the syndicate desk when an offering was trading poorly, lots of market headwinds.  Risk off week, with oil, gold and stocks all down.  Natural gas was up a bit, but is still 40% cheaper than a year ago.  Also, the MLP ETF AMLP had its ex-date Monday, which added to the sector pressure.

In addition to the headwinds, MLPs did themselves no favors by pricing $1.6 billion in MLP capital markets transactions this week.  Counting the $500 mm equity LNG plans to invest in CQP (see below).  Add in the $800 million of At-the-market equity distribution deals filed this week ($500 by KMR and $300 by PAA), and it turns out more than $2.8 billion in combined debt and equity was raised by MLPs this week.  That’s a huge number, and it seemed to clog the drain a little on the way down.

Let’s say the MLP capital market is this guy in the video below: the world record holder for most thrown grapes caught in his mouth in 3 minutes.  Normally, he chugs along catching 2 grapes a second, no problem.  This week was like what would happen if the grape throwers starting throwing more grapes faster, while backing up.  The backing up part (market headwinds) would have been hard enough, but adding in the additional grapes, and this guy might get overwhelmed and start missing some, or maybe his mouth would start to fill up with grapes… you get the idea.  I’m also reminded in this analogy of the concept of marginal utility, grape 1200 is not as tasty as grape 5 or 10.

Sidenote: its great having 3 kids too young to be coordinated enough to throw a grape up in the air and catch it in their mouth.  My ability to do so puts me on par with the greatest athletes in the world in their heads.

Pending MLP IPOs:

Oh, and there are more MLPs to come.  By my crude count, there are currently 10 MLPs in various stages of IPO registration, including 3 new names this month so far.   Josh Davidson at Baker Botts is very busy, with his name on the cover of 5 of the 10.  Here is the full list:

• Armstrong Resource Partners (Amendment 5 filed 5/4)
• Sprague Resources (Amendment 4 filed 3/23)
• USA Compression (Amendment 1 filed 5/10)
• Foresight Energy Partners (Amendment 1 filed 4/12)
• Quicksilver Production Partners (Amendment 1 filed 5/11)
• EQT Midstream Partners (Amendment 2 filed 5/10)
• Maxum Energy Partners (Initial S-1 filed 5/4)
• Northern Tier Energy LP (Amendment 2 changed this corporation into MLP on 5/7)
• Lehigh Gas Partners (Initial S-1 5/11)
• Southcross Energy Partners (Initial S-1 4/20)

It makes you wonder who will buy all these incremental MLP units?  The MLPs that are currently trading can’t catch a bid, like we saw with CLMT this week on a relatively small equity issue (see below).  Who is out there that doesn’t own MLPs or hasn’t heard about MLPs and is going to support this sector’s massive paper addiction?  I guess like any supply and demand equation, if there is truly no demand, then MLPs would stop issuing so much equity….right?

News of the (MLP) World

• Markwest buys Keystone Midstream, Expanding Marcellus and Utica Footprint, Then Issues $442 mm In Equity (press release)
• $512 mm consideration
• Keystone was owned by Rex Energy, Stonehenge Energy and Sumitomo Corp
• MWE will need to invest $500 mm in growth capex to support Rex’s drilling program and to achieve target $130 mm EBITDA by 2016
• Another high multiple purchase in the Marcellus with hockey stick growth expectations, betting on the come starting to become the norm in the Marcellus (like with WPZ’s high multiple purchase of Caiman)
• 8.0 mm unit equity offering at $55.28 per unit, raising $442 in gross proceeds (press release)
• MWE’s 10th equity offering since beginning of 2009, most in the MLP sector, and 4th offering in last 12 months
• Last equity offering was in March, at a per unit price 8% higher than this one
• All that growth has to be funded, MWE’s distribution per unit is up 18% year over year, but its 3 year distribution CAGR is only 7.3%
• Crosstex Energy ($XTEX) Announces Expansion, Issues Equity and Debt, total Proceeds $393 mm (equity and debt)
• $250 mm senior notes due 2022, priced at 7.125%
• $143 mm equity at 3.5% re-offer discount, trades well in after market, closing above issue in negative week
• Use of proceeds Cajun-Sibon NGL pipeline and Riverside expansion
• XTEX will expand Riverside fractionation facility in Louisiana (press release)
• Capacity increases 10,000 bbls/d, from 4,500 to 14,500
• Underwritten by long-term supply contract
• Cost of $16mm, to be in service 1Q13
• BreitBurn Announces Acquisition (press release)
• $220 mm purchase price, 56% oil, 13 year reserve life, 9.5 mmboe proved reserves, 160 drilling locations, 49 existing wells
• First acquisition for BBEP in Permian Basin
• Oiltanking to Acquire United Bulk Terminal (press release)
• This is OILT’s parent company making the acquisition, terms of the deal undisclosed
• OILT traded well on the news, I guess on outlook for future potential dropdown, OILT was up 3.7% on the week
• PVR Prices Upsized Bonds (press release)
• 8.375% yield, 2020 maturity
• Deal was upsized from $450 mm to $600 mm
• Use of proceeds to fund portion of Chief acquisition, rest to term out some of credit facility
• Copano Announces Fresh Expansion at Houston Central (press release)
• 400 mmcf/d additional processing capacity
• $190 mm cost to be in-service by 2014
• 5x cash flow multiple, very solid
• Announcement does nothing to stop alleviate the beat down CPNO unit price took this week after earnings and indications that the richness of the gas from the Eagle Ford was causing operational issues
• Distribution growth won’t happen in 2012, its as if CPNO and ETP have a bet as to who can go the most consecutive quarters without a distribution increase (FGP at 66 quarters is the Dimaggio of this particular stat)
• Calumet Specialty Products (CLMT) Equity Offering (press release)
• 6.0 million units, priced at $25.50 per unit, $153mm in gross proceeds
• CLMT priced at a 4.6% discount, second highest this year
• Traded down another 5.7% the next day, for total of 10% decline in one day, finished the week down 9.6%
• LNG gets $468mm equity infusion from Asian Partners (press release)
• Temasek and RRJ Capital to invest in Cheniere Energy ($LNG)
• Temasek and RRJ are asia-based and focused investment firms, which are now in discussions with LNG on a strategic relationship to help Cheniere tap the Asia market
• LNG will use the proceeds plus cash on hand to purchase $500mm of equity in Cheniere Energy Partners ($CQP)
• Parties are working on strategic partnership for LNG sales, marketing and trading

Disclosure: The information in this article is not meant to be financial advice, I am not your financial advisor and I am posting my comments for informational purposes only.