Week Thoughts: MLPs Party Like its 2009

MLPs kept the healing going in spectacular fashion this week, rallying through Doha and KMI’s weak outlook to finish up 10.5%.  MLPs were up every single day this week, sending almost every MLP up from last week.

Weekly Review_4-22-16

This is what MLPs trade like when there is no friction, they are able to float higher.  Friction has been removed for the moment: Earnings season probably has most ATM programs turned off, there were no equity offerings this week, commodity prices pushed higher, and buyers tend to show up quarterly in advance of distributions.

Let’s Go Crazy

As you may have heard, Prince died this week.  It was hard not to learn some facts about Prince’s life with the many obituaries published: very short, very talented, very religious, played basketball surprisingly well.  I remember the last fact from back when he played in MTV’s Rock ‘N Jock basketball games, although I haven’t been able to find any evidence on the Internet that he played in those games or that those games even took place.

Chappelle_Prince

Let’s Go Crazy was one of his hit songs.  After grinding higher for 3 straight weeks with small weekly gains, MLPs went crazy this week, positing one of the best weeks the sector has ever had.

Best Weeks

In the last 6 months, MLPs have had 3 of the top 6 best weeks of all time (we’ve also had 3 of the top 7 worst weeks of all time for the index.  Generally, the good weeks follow extreme negative weeks.  It doesn’t usually happen that a top 10 week for MLPs comes on the heels of 3 straight positive weeks.  Looking back over the last 11 weeks and the 47% rally off the early February bottom shows that the rally started with a 10.5% week, and this week’s action punctuated the rally with another 10.5% week.  Incredible.

Last 11 Weeks

Doha and Kinder Non-Events?

MLPs (and oil prices) rallied right through the lack of an agreement at the Doha meeting among major oil producing nations, and no one had a great answer as to why, other than oil fundamentals may be improving faster than the world is ready to admit.

KMI reported earnings Wednesday that weren’t terribly encouraging for the midstream sector overall.  2016 guidance was reduced 3% on weakness in the Eagle Ford and on coal customers declaring bankruptcy.  Also, KMI removed development projects from its backlog, noting that Northeast Direct returns were a paltry 6%.

MLPs managed to sustain their rally Thursday and Friday, effectively de-coupling from KMI, which traded down after earnings.  There were some MLPs with Eagle Ford exposure that underperformed on Thursday in sympathy with KMI, but it was isolated and didn’t last through Friday for those MLPs, while KMI stayed down.

But KMI’s earnings release should have some read-through.  It would not be a surprise to see some MLPs make KMI-like announcements: reducing project backlog and posting weaker near-term results as a result of weak volumes in areas like the Eagle Ford, Bakken and some of the higher cost natural gas basins.  It wouldn’t surprise me in those cases to see individual MLP prices to react similarly to KMI when they release earnings.  The huge rally that culminated this week sets up MLPs as “sell the news” situations, at least in the short run.

Winners & Losers

Only 2 MLPs went down this week.  The minimum to break into the top 5 this week was 33.5%, which is pretty incredible.  Two MLP distribution cuts among midstream MLPs in the AMZ this week sparked aggressive buying, due to the accompanying announcements that seem to indicate some level of stabilization for two MLPs that had been written off almost universally.

CEQP cut first, and also announced a transaction that immediately de-levers the MLP and sets up high coverage going forward.  NGL followed it up Thursday, “temporarily” cutting distributions, getting a preferred equity infusion and lowering guidance released just a few months ago.

Top5Bottom5_4-22-16

Top-tier growers didn’t show up in the bottom five this week, but they weren’t huge outperformers either.  The largest cap MLP, EPD, has leverage to the burgeoning NGL meme propagating through the sector the last few weeks, and it outperformed this week.

Top5Bottom5_4-22-16_chart

MLPs are now positive overall year-to-date, but individual MLP performance is dispersed across a wide range.  SXCP came from outside the top 5 to the top spot after its big week.

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SDLP bounced up into the top 5 as well, displacing OCIR.  On the bottom 5, each of last week’s MLPs were positive, except for CLMT.  WLKP replaced CEQP in the bottom 5 as well.

Top5Bottom5_4-22-16_YTD_chart

General Partner Holding Companies

All general partner holding companies were positive this week, and as a group the median outperformed the MLP Index, led by ETE’s 30% rally on news that it may have found a tax opinion loophole to exit the WMB merger.  ETE disclosed an intent to cut its distribution if the merger is approved, so the theme of MLPs rallying on distribution cuts bled into the GPs as well.  SE and EQGP repeated in the bottom 5 this week, unable to keep pace with spikes among other general partners.

Top5Bottom5GPs_4-22-16

Top5Bottom5GPs_4-22-16_chart

News of the (MLP) World

Preferred equity, project cancellations and asset sales are a far cry from the IPOs and growth projects that used to fill this section.  We did get a number of positive distribution announcements.

Financing

  • Western Gas (WES) announced issuance of 7.9mm of 8.5% Series A perpetual preferred units as an add-on to the 14.0mm preferred units issued in March (press release)
    • Net proceeds of $247.5mm will be used to repay credit facility borrowings incurred for Springfield acquisition
  • NGL Energy (NGL) announced issuance of $200mm of 10.75% coupon convertible preferred units (and 3.6mm warrants) to Oaktree Capital (press release)
    • Preferred issuance was announced in conjunction with 39% distribution cut
    • NGL had been yielding 23.8% prior to the distribution cut, so the cut was to a 14.5% yield, stock traded up 24%, implying a new yield of 11.7%
  • EPD files S-3 for $2.2bn (filing)

Asset Sales / Growth Removal

  • Crestwood Equity (CEQP) announced sale of 50% of its Northeast natural gas and storage business to publicly-traded utility company Consolidated Edison for $975mm (press release)
    • Proceeds from the asset sale will be used to reduce leverage to 3.5x EBITDA
    • The interest was sold at a 13x multiple of next 12 months EBITDA
    • In conjunction with the assets sale announcement, CEQP announced a distribution reduction of 56.4%
    • Revised guidance calls for 1.6-1.8x coverage in 2016
    • CEQP rallied hard to a new implied yield of 13.2%, and still a very discounted multiple of near-term distributable cash flow
  • Kinder Morgan (KMI) announced $4.1bn reduction in organic growth project backlog, mostly due to removal of Northeast Energy Direct pipeline and the Palmetto Pipeline (press release)
    • Growth projects with sufficient returns are not easy to come by these days

M&A / Growth

  • None

Distribution Announcements – 28 this week

Distribution Announcements

Category MLP Market Post