Week Thoughts: Everything Up…Except MLPs

For any of the 900,000 people living in Connecticut who have been without power for the last 12 days, apparently you are back online, so welcome back.

This week, the MLP index closed down 1.4% on a price basis (less if you consider distributions that hit this week).  The S&P 500 had a positive week (+0.8%), despite dropping 3.7% on Wednesday.  Interest rates on 10-Year treasuries were flat, gold had another strong week, and oil futures were up approximately 5%, sending the Brent-WTI spread is down to less than $15 per barrel.  Other than MLPs, it seems like everything was up.

MLPs had an eventful week, with more equity issuance than any other week in the history of the sector (not counting KMI IPO week), as discussed here.  So, MLP underperformance was a combined result of equity issuance and several ex-dates that hit early in the week.  Distribution ex-date season is over for another 3 months.  So, as the market digests all of the equity issued this week and if WTI oil futures break above $100 next week, I’d expect MLPs to catch up and outperform next week, unless there is another $1.0+ billion of equity issued this week.

See below for a chart of the MLP Index compared with the S&P 500, and you can see how the massive amounts of equity pumped into the MLP system this week weighed on the index in a “risk on” week.  The broader stock market recovered Thursday and Friday apparently on improved jobless claims domestically and some positive signs in the Italy situation.

LGCY, PAA and ETP all priced their equity offerings before Wednesday’s market beatdown, and therefore are all trading more than 2% below their issue prices, despite a market recovery Thursday and Friday.  LRR Energy (LRE), priced its IPO Thursday night at $19 per unit, and traded below that most of the day Friday, before closing up $0.05 at $19.05 per unit.

PIPEs are Back, Hopefully Not with a Vengeance

There was also a PIPE (private investment in public equity) deal this week, for $170 million into Teekay Offshore ($TOO) divided amongst Kayne Anderson, Fiduciary Asset Management, Salient Capital, and Tortoise (press release).  Back in May on stage at the NAPTP Conference, Kevin McCarthy of Kayne Anderson said the PIPE market would come back, and this is the largest PIPE deal I’ve seen since the go go 2006-2007 days, when it seemed like there was one every week.

McCarthy also said that his firm, as the likely lead investor in these deals going forward, would hold MLPs to a higher standard of investor, and not let any hedge funds without a track record in the space into these club deals.  Some of the institutions that were involved in the previous PIPE boom have been blamed for some of the collapse that occurred in the sector when the PIPE market burst.  McCarthy and his firm seem to have put together a solid group this time, so, in Kayne we trust as far as the PIPE market goes.

PIPEs generally make sense for an MLP that is making an acquisition and would rather announce the acquisition and the equity simultaneously to keep the market from selling off its unit price in anticipation of the equity financing that would be pending without a PIPE deal.  This week, it worked for TOO, which announced $165 million of vessel purchases and the PIPE deal at the same time.

Winners and Losers

The chart of the biggest movers in either direction is below.  Niska Gas Storage ($NKA) retains the bottom spot for the second straight week, and is now down 45.0% this year.  In other words, if you invested $100 in NKA at the end of last year, you would now have $54.98, even after pocketing $7.02 in distributions on your $100 investment.   NKA’s ex-date was Wednesday, and it appears that those still holding NKA units took that distribution and exited this week.  BWP also had its ex-date this week, but the others on the bottom 5 are high beta small cap MLPs that tend to be down more than others in a down week (although RNO did announce earnings this week).

XTEX was the big winner this week, despite missing earnings expectations, up 10.2%.  Of the E&P’s on the chart, PSE was up 7.2% on no news, and VNR was down 7% on no news (although VNR ex-date was last Friday), strange.

It will be interesting to see what crisis will capture the media’s (and possibly the market’s) attention in the coming weeks.  My bet is the Super (Inept) Committee, anyone else have a suggestion?

 

 

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

 

 

Category MLP Market Post