MLP Week Thoughts: Taking Stock After Another Good Week

MLPs are up 4 weeks in a row, including 1.8% this week, making investor pockets a little greener.  Ethane and propane spiked this week, oil and gas were also up, stocks were flat again.  Oh, and there was a bunch of rain and lightning all over Texas, making the grass a little greener on my lawn.

This time of year is always a good time for me to stop and take stock (and by taking stock, I mean reflecting, not taking stock certificates, but if you raise your hand, MLPs will happily fill it with stock, I’m sure).  It was 5 years ago today that I quit Lehman Brothers at the peak of the MLP market, leaving a promotion on the table to pursue my own ventures outside the MLP space and the banking space entirely.  I quickly learned that the easy money on Wall Street in the mid-2000s wasn’t raining down once you leave that bubble, especially once after that bubble burst and sent Main Street and housing markets down to where they remain today.  But, after a lot of lessons and hard work, the MLP sector has survived and thrived and so have I.

It was also 5 years ago (7/13/07) that the MLP Index closed at a 5.37% yield, its lowest ever.  By comparison, the MLP Index closed Friday at a 6.2% yield, which is still lower than average for the MLP Index over the last 10 years, but still 80 basis points higher than the all time low.  Yield is also not the purest of numbers, a significant determinant of MLP distribution yield is how much MLP management teams are holding back (i.e. how much coverage they maintain).  If MLPs do return to their historical low yield again, it will likely have been the result of an increasing number of MLPs choosing to hold back cash and carry higher coverage, distributing than they could to avoid having to tap the capital markets.

Barring a major flow of funds into the MLP space from large institutions, which would enable ever larger and more frequent equity offerings to be digested by the market, I would expect MLPs to build coverage over the next few years to the extent they can.  I would feel much more comfortable with a yield of less than 5.5% if all the MLPs were carrying 1.5x distribution coverage ratios.  Above is a chart of MLP Index yield over the last 10 years.  I don’t have a sector distribution coverage chart to match up with the yield chart above, but anecdotally, I recall 5 years ago that most MLPs with the exception of a few (like ARLP) carrying very thin coverage and distributing out as much as possible at those low yields to juice valuation.  That aggression and thin coverage came back to haunt many MLPs the last 5 years, but I’m sure there would be some MLPs that would do it again if yields went to the low 5% range.

Back to the here and now, KMP kicks off earnings season this week, which should be rocky.  Fertilizer results should be strong and guidance should be positive.  Most other MLPs will be negatively impacted by fundamentals this quarter, like lower oil and NGL prices, lower volumes on lower rig counts and activity, and not improving natural gas storage fundamentals.  Even stalwart MLPs with fee-based cash flow like WES may report volume issues.  All ears and eyes will be on what MLPs plan to do about the current environment and what their expectations are around growth projects and M&A going forward. Improving commodity prices the last few weeks and a jump in NGL prices this week may be enough to keep MLPs moving higher even on weak past results.  That and investors piling into MLPs to capture distributions in between announcement and ex-dates.

News of the (MLP) World

  • Teekay Offshore Partners (TOO) announced private placement of 1.7mm L.P. units for gross proceeds of $45.0
    • Units were purchased by Salient, ClearBridge and Harvest Fund Advisors
  • Golar LNG Partners (GMLP) announces acquisition of interests in the companies that own and operate a the floating storage and regasification unit from its general partner Golar LNG Limited for $385mm
    • GMLP announced pricing for public offering of 5.5mm units at $30.95/unit, raising $170.2mm in gross proceeds, 3.7% discount to last close
  • Eagle Rock Energy Partners (EROC) announced pricing for private placement of $250mm of 8.375% senior notes due 2019 at 98.5 (YTM of 8.67%)
    • Add on to $300mm offering in May
  • Suburban Energy Partners (SPH) announces receipt of requisite tenders and consents in exchange offers and solicitations in connection with planned acquisition of Inergy, L.P.’s retail propane operations
  • Williams Partners (WPZ) announces investment in joint venture with Caiman Energy II to develop natural gas, NGL and crude oil gathering and processing infrastructure in the Utica Shale
    • Same management team from Caiman Energy, acquired by WPZ a few months ago.  This equity commitment of $380mm over the next few years from WPZ was probably part of that deal and just got finalized this week
    • If Caiman can do what they did in the Marcellus in the Utica, should be good for everyone involved

Distributions:

  • NGLS raised distribution 3.2% quarter over quarter
  • PAA raised distribution 1.9%
  • GEL raised distribution 2.2%
  • EPD raised distribution 1.2%
  • CPNO, NKA, TOO and TGP held distributions flat

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.

Category MLP Market Post