MLP Week Thoughts: Winter is Coming

A day after OPEC rocked the global oil markets with inaction, the U.S. markets opened for 3.5 hours Friday, and energy stocks were crushed.  The Alerian MLP Index (AMZ) ended Friday down 5.2%, its worst day in more than 3 years.  For the week, MLPs gave back all the gains from last week times two, with the AMZ down 6.0% and the equal-weight version (AMZE) down a staggering 7.7%.

Weekly MLP Review_11-28

For the AMZ, it was the second worst week of the year.  But it was the worst week of the year (and the last 4.5 years) for the AMZE, as selling was more concentrated on upstream and services MLPs (that tend to be smaller) compared with midstream MLPs.  It is important to have perspective, however, and realize that the AMZ is 8% higher than its low in mid-October (including distributions), and as we have see in recent weeks, MLPs can swing violently to the upside as well.

WTI oil futures price was down around 14% this week, including heavy selling late into the afternoon Friday.  Oil settled below $66.00/bbl, which is literally off the charts low.  Producer published IRR sensitivity tables usually have a range of WTI price that goes from $70 to $100/bbl.  Natural gas fared better and remains above $4/mcf. NGL prices did not trade Friday, but expect propane and ethane to be down substantially Monday.

When you start becoming a player in the world market for oil and gas, beyond just as an importer, as the U.S. has in the last few years, global news items start to play a larger role.  Those news items are not always in tune with the U.S. holiday calendar, a new phenomenon for MLP investors.  As shown in the chart below, the Friday after Thanksgiving is typically a low volume, low volatility affair (with the exception of 2008).

AMZ-PostThanksgiving

2014 was far and away the worst post-Thanksgiving day.  Certainly the action Friday has to be taken with a grain of salt.  On Monday, when the markets get back to functioning normally, expect to see more volatility in both directions.

Winter?

It was a brutal week all around in the energy complex, and some commodity-focused research analysts are calling for a very long period of prices that remain below $85/bbl.  In the book series (and now popular HBO show) Game of Thrones, there is a saying that a particular group is fond of repeating as a sort of provincial mantra: Winter is Coming.  The motto is both a warning and a reminder to remain constantly vigilant.  Its meaning can be heard in the echo of management teams like PAA’s that have incessantly talked of a time when it would be important to have a fortified business model and liquidity to spare.

Winter

Since oil prices last fell this sharply (2008), the U.S. energy sector has enjoyed a long and prosperous summer.  It appears that summer may be over.  The open question remains as to how long this winter will last.  Many MLPs are not anywhere close to being prepared for Winter.  Those MLPs that are able to demonstrate distribution growth and limited cash flow volatility amidst commodity chaos around them will separate themselves from weaker MLPs.

Winners & Losers

Varying degrees of perceived or actual oil price exposure and beta drove wide disparity in returns this week.  There was no company-specific news for any of the top and bottom 5 MLPs this week.  Among the few winners this week was recent IPO SHLX, which got a pop when analysts published their initiation reports on it.   Amazingly, all 5 of the bottom 5 were down 20%+ this week.  3 of the 5 were upstream MLPs, and another directly services production with sand (HCLP), so as you would expect with a big downdraft in oil prices.

Top5Bottom5_11-28-14

NKA led all MLPs up last week, and reversed course this week, exemplifying the sentiment flip flop we saw from week to week going from the best week of the year to the second worst week.

Top5Bottom5_11-28-14_chart

In terms of YTD returns, PSXP has been caught from behind by TEP for the top spot in the sector, while SHLX’s strong week pushed it into the top 5.  On the downside, BWP and NRP, each of which cut their distribution in 2014, are no longer in the bottom 5, pretty incredible given how drastic the selloffs were after the cuts were announced.

Top5Bottom5_11-28-14_YTD

Top5Bottom5_11-28-14_YTD_chart

News of the (MLP) World

No capital markets activity this week.  Expect some action next week, as MLPs try to access the capital markets in advance of what may be a challenging 2015.  It will be interesting to see how the next MLP IPO goes, because in the last period of turmoil in October, MLP IPOs still got done at record low yields and in record size.

M&A / Growth Projects

  • Crestwood Equity (CEQP) announced sale of Tres Palacios natural gas storage facility to joint venture of Crestwood Midstream (CMLP) and Brookfield Infrastructure Partners (press release)
    • Purchase price is $130mm
    • CMLP will own 50.01% of the JV, with Brookfield owning the remainder
    • Brookfield will enter into 5 year, fixed-fee contracts with Tres Palacios for 15 bcf of storage capacity (out of 38.4 bcf for the whole facility) and interruptible wheeling services that will add $16mm of revenue to Tres Palacios
    • Tres Palacios has been a drag of around $2.5mm per quarter for CEQP in recent quarters
  • Plains All American (PAA) announced plans to expand capacity on the Cactus Pipeline (press release)
    • PAA will expand the capacity from 250,000 bpd to 330,000 bpd
    • Expansion is expected to be in service by 4Q 2015
  • NGL Energy (NGL) acquires the remaining 50% interest in the Grand Mesa Pipeline, LLC from Rimrock Midstream for an undisclosed amount (press release)
    • NGL now owns 100% of the system, which is currently being developed with an expected in-service date of 4Q 2016
  • NGL Energy (NGL) acquires two salt water disposal wells in the Bakken Shale area for $34.6mm (press release)
Category MLP Market Post