MLP Week Thoughts: Melting Point

MLPs finished positive for a second straight week, gaining 4.9% or 6.0% with distributions. But for a couple of reasons, it didn’t feel like a +4.9% week. First, the rally was top heavy, with the Alerian MLP Index beating the equal weight version by 240 basis points, which can happen when EPD and ETP, combined 30% of the index, are both up double-digits percentages. Second, despite MLPs rallying more than 20% since last Wednesday, MLPs still had their worst month since the Global Financial Crisis.

That being said, the 12% YTD price decline isn’t as bad as if feels either. As a friend reminded me this week, MLPs are actually outperforming the S&P 500 since the middle of December by more than 500 basis points. At this point, its not just MLPs falling, the world seems to have caught up.

Weekly Review_1-29-16

Last week, I said the rally might be extended if oil prices stay above $30/bbl and EPD results were solid. Oil is well above $30/bbl, EPD had solid results and the rally continued. It also helped that there were several capex reductions announced, which puts less pressure on MLPs to raise expensive equity.

There is a tipping point for MLPs between sustainable survival and survival with an expiration date. The focus for MLPs today is to extend the survival expiration date for as long as possible. Pushing out capex, shoring up the balance sheet and cutting costs are some of the methods being employed and embraced by the market.

Time is the key factor. MLPs that can continue business as usual for an extended period of time will be much better positioned to benefit from distress among other MLPs that have a shorter countdown under current conditions.

Thawing Sentiment

The base case for long MLP investors is that conditions will improve from here over the medium term. But absent a big spike in oil prices or the global financial markets, MLP stock prices will depend on proving each quarter the stability of their balance sheets and cash flow. This week highlighted a road map for how that might happen as earnings season continues.

Apologies for referencing snow for two straight posts, but it’s a bit like the 20 inches of snow covering my backyard at the moment. It hasn’t snowed since the blizzard last Saturday, and with temperatures in the 40s, the snow crust may have thinned from 25 inches down to 20 inches, but at this rate, it will be a while before I see any grass.

Snow Mound

What could accelerate the thaw is a big spike up in temperature into the 60s. Having said that, even with a few warm days, it will be months before the 6-foot high mounds along the driveway completely thaw. Other (better-positioned) areas around my house have already thawed.

Bringing it back to MLPs, if oil prices spike to $50-60 in the next month, MLPs will see a thawing of negative investor sentiment across the board, but in the absence of that spike, the market will focus on those MLPs not buried in 6-feet of snow first.

Poll Question

Last week’s poll question asked when retail funds would come back to the MLP sector if oil prices stabilize and distribution remain steady on average. The most popular answers were 3 and 6 months, which seems about right. This week, we ask for your opinion on the various factors that seem to be weighing on the sector at the moment and which you think is the heaviest of them.

What's the single biggest factor weighing on MLPs right now?

  • Oil prices, global growth or other macro factor (32%)
  • Leverage and credit rating downgrade concerns (22%)
  • Fears of distribution cuts (20%)
  • Technical selling (pick a boogeyman: hedge funds, closed end funds, retail exiting, merger arbs, 2016 early tax loss selling) (14%)
  • Producer counterparty concerns (13%)

Total Voters: 224

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Status Update

January ended down 11.1%, the 4th worst month ever for the MLP index, by far the worst January ever, and the 3rd straight negative month. Looking at the quarterly numbers, MLPs have endured the longest ever streak of consecutive negative quarters (5) and are off to a bad start to the 6th quarter since the downturn began. On an annual basis, the performance so far in 2016 would be the 3rd worst year overall if it trades flat for the next 11 months.

Monthly_1-29-16

Winners & Losers

This week saw a continuation of the trend this distribution season where an MLP seems to be at risk of a distribution cut and is priced as such, but instead maintains the distribution from last quarter and sees its stock price pop double digits on the day of the announcement JPEP, AMID, ARLP, CEQP and others fall in that category. The daily volatility should continue through earnings season as some MLPs get a chance to provide fresh data that might suggest businesses that aren’t in total shambles.

On the downside, GLP’s surprise distribution cut hurt its performance, while its hard to identify what was driving the weakness among other losers.

Top5Bottom5_1-29-16

Top5Bottom5_1-29-16_chart

Year to date, FELP leads all MLPs to the downside, and is down more than 90% from its IPO in June 2014. CCLP and TOO both cut distributions, and AZUR and FELP trade at sub-$2 stock prices. CEQP announced this week it was maintaining $1.055/unit distributions this quarter, which is good for a 41.5% yield.

Top5Bottom5_1-29-16_YTD

Top5Bottom5_1-29-16_YTD_chart

General Partner Holding Companies

Kinder Morgan continued its post-earnings, up 16.8% including its dividend this week (not pictured below). GP performance was mixed, however, and the median performance of 2.4% underperformed the MLP Index. ETE’s stable and growing subsidiary MLP distributions announced this week, along with capex cuts at ETP and WPZ were helpful for every MLP associated with Energy Transfer, but wasn’t enough to send ETE higher.

Top5Bottom5GPs_1-29-16

ETE’s action was probably related to news reports that ETE remains committed to the WMB merger on the original deal terms that include a substantial cash portion. However, there also might be a case to be made that all of the capex cuts around the MLP sector and lack of equity issuance on the margin further lowers the growth potential of GPs, especially if those GPs are having to support their subsidiary MLPs with IDR waivers.

TRGP had a second consecutive double digit return week, helped by operating leverage to positive NGL price changes. WGP made it two consecutive weeks near the bottom of the GP group.

Top5Bottom5GPs_1-29-16_chart

News of the (MLP) World

News-of-the-World

Equity/Debt

  • Enable Midstream (ENBL) announced sale of $363mm of 10% preferred shares to sponsor CenterPoint Energy to repay notes payable to CNP that carried a much lower interest rate (press release)
    • Further evidence that MLPs are doing their best to focus on improving leverage metrics above almost anything else, as this high cost issuance reduces leverage at the expense of the income statement
    • ENBL also announced $375mm reduction in 2016 capital expenditures
  • Cheniere Energy (CQP) is seeking to refinance $2.5bn of debt (Bloomberg)

Growth Projects / M&A

  • Several MLPs reduced capital expenditure plans, which is what investors are looking for these days, and is exactly the opposite of what the market wanted in 2014 when capital was much cheaper
    • Deploying capital in this environment requires a very compelling return or requires a very compelling cost of capital and a mediocre return
    • Return opportunities are few and capital is very expensive today
    • It is refreshing to see the sector reward MLPs for being a bit more prudent with capital, for some it’s a shame it took an 18 month oil price collapse to get there
    • ENBL, WPZ, EPD, ETP, MEMP all reduced spending plans for 2016
    • WPZ discussed assets sales target of $1bn in 2016 to manage capital needs
  • Enbridge, Inc. (ENB) acquired gathering and processing assets in Canada from Murphy Oil for $538mm (press release)
    • Any signs of M&A in North American midstream are a good sign, Murphy Oil indicated large group of bidders for the assets that included midstream companies and private equity

Other

  • Natural Resource (NRP) announced 1-10 reverse unit split, effective 2/18 (press release)
  • Management shuffling in the sector continues amid recent sector carnage.
    • Memorial Production (MEMP) CEO John Weinzierl resigned his other job as CEO of Memorial Resource Development to focus on MEMP (press release)
    • NGL Energy (NGL) CFO Atanas Atanasov announced resignation to pursue another opportunity in Dallas (form 8-K)

Distributions

  • SUN +7.5% quarter over quarter
  • MPLX +6.4%
  • SXL +4.6%
  • CPPL +4.3%
  • VLP +4.1%
  • DKL +3.5%
  • CPGX +3.0%
  • VTTI +3.0%
  • MMP +3.0%
  • SRLP +3.0%
  • Flat: WPZ, AMID, CELP, SXCP, ARLP, CEQP, GMLP, MEP, APLP, ETP, ETE, ARCX, CNXC, GLOP, EEP
  • Reduced: EVEP -85%, GLP -33.7%, MEMP -67%
Category MLP Market Post