It’s time again for the MLP sector over-unders, in a post that has become an annual tradition. The post is coming out a bit late this year, and that means we have some early indications on many of the statistics, but there are plenty of unknowns in the sector to discuss.
The goal of this exercise is to discern the market’s expectation for certain statistics related to the MLP sector in 2015, and then to make a directional call on that number with some commentary. In other words, we set lines for MLP sector numbers and we enter our picks (see previous years: 2012, 2013, 2014). Then we come back next year and review how we did (last year I went 4 for 10). The concept was originally inspired by a recurring segment on the TV show “Pardon the Interruption” called Over Under.
Like we did last year, we hope that you will share your expectations for each item with us. It’s a fun way to speculate on expectations the market has for MLPs for the year, and to compare those expectations with ours and yours.
1. MLP IPOs
- Line: 12
- My Pick: Under
- 2014 Result: 18 (not counting NextEra Energy Partners, Landmark)
- 2013 Result: 19 (not counting CQH or PAGP)
The last three years, we have seen an average of 16 MLP IPOs per year. I expect fewer IPOs this year than last year. The MLP IPO backlog is higher today than it was a year ago, but the market is likely to be less receptive to MLP IPOs in 2015 compared with recent years. Already we have seen one MLP in the backlog forego the IPO process by acquiring a GP interest in an existing MLP as a way to access the MLP market. We will likely see other “dual-track” processes whereby a MLP sponsor files for an IPO and also runs a sell-side process simultaneously.
The backlog of MLPs that have filed for an IPO stands at 12, with another 4 companies that have publicly disclosed their intent to launch an MLP IPO, for a total of 16 companies. I believe a reasonable expectation, given the collapse of oil and recent MLP weakness, is that 25% of those filed or planned IPOs don’t get done. That takes the expectation for the year down to 12, and while the backlog could grow over the course of 2015, some names in the backlog might be removed as well, so 12 is probably a reasonable expectation for MLP IPOs in 2015.
Alerian MLP Index Returns vs. S&P 500
- Line: Pick ’em
- My Pick: Over
- 2014 Result: -880 basis points
- 2013 Result: -482 basis points
- 2012 Result: -1050 basis points
Since the end of 2011, MLPs have underperformed the S&P 500 pretty dramatically. If you invested in the S&P 500 at the end of 2011, and compounded returns, you would have had 25% more by the end of 2014 than if you invested in the Alerian MLP Index. 3 years in a row is the longest losing streak MLPs have had since the late 1990s tech bubble. Early on in 2015, it looks like the S&P is on track to win another year.
I believe the streak will end this year, and MLPs will outperform. MLPs had a rough last 4 months of 2014, and by now the commodity price collapse is pretty well priced in for midstream MLPs. After a few upstream MLPs in the Alerian cut distributions, the index will rebalance itself away from upstream MLPs, reducing the index’s exposure to commodity prices. As oil prices stabilize, and start gathering upside momentum, MLPs should begin to price in a brighter tomorrow for energy stocks.
3. AMZ (cap-weighted) vs. AMZE (equal weight)
- Line: Pick ‘em
- My Pick: AMZE
- 2014 Result: AMZ +1078 basis points
- 2013 Result: AMZE +291 basis points
- 10 year average: AMZE +70 basis points, but AMZE only outperformed 4 out of 10 years
AMZ outperformed the AMZE by more than it ever has in 2014, driven by strength in large cap MLPs (KMP/EPB buyout helped that) and by massive losses in upstream MLPs. With all the turnover within the Alerian MLP Index constituents, the newer, high growth MLPs (like MPLX, PSXP, VLP recently added) have been replacing upstream MLPs. QRE was acquired, BBEP and LINE will need to come out of the index, and pending mergers (APL, WPZ, OILT) will add 3 more new names. Those high growth names will likely outperform. Also, consolidation within the sector favors the potential target MLPs as opposed to the mature, large cap MLPs.
4. General Partner Holding Company IPOs
- Line: 2
- My pick: over
- 2014 Result: 0
- 2013 Result: 1, but 3 if you count CEQP and OKE
- 2012 Result: 1
We had a streak of 4 straight years of 1 GP IPO per year (TRGP, KMI, WGP, PAGP) that ended in 2014. We had a lull this year, but after the IPO boom over the last 3 years, and the high growth rates of the newer MLPs spin-offs, there are several MLPs that are approaching the top tier of the IDRs. EQM’s sponsor has already announced plans for a GP IPO, and I expect others to follow. In addition, EXLP’s parent has plans to become a pure play GP in 2015.
5. MLP Consolidations / General Partner Sales
- Line: 7
- My Pick: over
- 2014 Result: 11 (ETP/SUSS, KMI/KMP/EPB, CST/CAPL, TLLP/QEPM, BBEP/QRE, EPD/OILT, NGLS/APL, WPZ/ACMP, NGL/TLP, Flint Hills/PDH, WLB/OXF)
- 2013 Result: 9
- 2012 Result: 2
This line was determined based on the average of the prior three years results, and I think reflects about where the market expectations are. Consolidations are tricky to predict, but with all the talk from KMI and PAA, chances are we see some MLP change of control fireworks in 2015. My best guess is between true consolidations and GP sales, we get around 5 such transactions.
A few years ago, in the 2013 lines post, I suggested that ETP buying RGP might be one of the consolidations we saw that year. Well, 2 full years later that deal finally happened. So, counting the Azure Midstream / Marlin Midstream deal, we are already at 2 consolidations this year so far.
6. MLP Distribution Cuts
- Line: 6
- My pick: over
- 2014 Result: 4
- 2013 Result: 1
- 2012 Result: 3
We’ve already had 4 distribution cuts in 2015 so far (LINE, BBEP, MCEP, NSLP), and other upstream MLP distributions have been called into question. With commodity prices depressed as they are, upstream MLPs are obviously feeling some pain, but there are likely some midstream MLPs that will contemplate distribution cuts as well.
7. MLPs Bought by Corporations (exiting MLP structure like Kinder)
- Line: None
- My pick: None
- 2014 Result: 1 or 2 depending on how you look at it (KMP/EPB/KMR)
- 2013 Result: 1 (PXD/PSE)
The last two years, we have seen 2 sponsors buy in their MLPs. The success of the KMI transaction and its trading performance following the acquisition is bound to spawn some copycats. WMB would seem the most logical choice, but there are many other MLPs sponsored by corporations that might determine at some point that their MLP plans are broken beyond repair.
Not counted in this statistic would be the buyout of an MLP by a sponsor that is also an MLP. We’ve seen that a few times over the last decade (EPD’s buyout of Duncan Energy Partners, PAA’s buyout of PAA Natural Gas). We may see that again with the likes of EEP (with MEP), NGL (with TLP), and the planned buyout of orphaned MLP QEPM by TLLP.
8. Equity Issuance in Marketed Offerings
- Line: $26.7bn (average of last two years)
- My Pick: under
- 2014 Result: $26.9bn
- 2013 Result: $26.5bn
With the commodity price challenges, tepid fund flows and lower trading volume of late, MLPs will be seeking unique ways to finance growth project that help them avoid issuing common equity in public offerings. MLPs will still raise substantial equity from the capital markets, but I don’t expect we’ll approach 2014 levels, especially with the rise of ATM issuance and without KMP in the MLP sector.
9. MLP Sub-Sector Returns
- My Pick: Gathering & Processing
In 2014, the best performing subsector within the Alerian MLP Index was the natural gas pipeline segment, which would have been a tough call early in 2014 after BWP’s distribution cut and EPB’s reduced distribution growth plans. But with EPB being bought out at a premium, and with strong returns from SEP, EQM, TEP and TCP, natural gas pipelines shined brightest in 2014. Oil and refined products pipeline MLPs came in second, based on our calculations. Worst performers that could potentially bounce back in 2015 include upstream MLPs and oilfield services MLPs.
There is quite a bit of uncertainty surrounding several subsectors that underperformed last year, including E&P, oilfield services, marine transportation, and gathering & processing. One of those subsectors will likely outperform the rest in 2015.
I believe gathering & processing MLPs are poised for a bounce back. As a group, they have shifted to a more fee-based model than they had in the last commodity collapse in 2008, and yet they have sold off rather dramatically the last few months. If they can show cash flow resilience throughout the year, it will help performance. Also, there may be significant M&A activity that drives returns for G&Ps.
10. 2015 Average WTI Spot Oil Price
- 2014 Average: $93.17
- 2013 Average: $97.98
- My pick: $55-$65/bbl
To this point, almost a month into 2015, the WTI spot oil price has averaged around $47/barrel. In order to average $70 per barrel for 2015, oil prices would need to average around $71.50/barrel every day for the remaining 235 or so trading days left in the year.