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Category Archives: MLP Market Post
Feb 3rd, 2012
MLP Market Post
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Week Over Week
The S&P 500 extended its lead over MLPs, with a 2.2% week, compared with 0.6% for MLPs. Oil and natural gas prices were down on the week, with natural gas giving back most of its gains from last week. Variable distribution MLPs continued to outperform, up 4.3%, mostly on the back of Rentech’s 10.4% week over week change. MLPs traditionally trade poorly during these few weeks when most of them have ex-dates. Most of the ex-dates have passed at this point, so expect MLPs to recover next week (all else being equal). So, ex-dates, weak commodity prices and what appears to be rotation into risk on assets like stocks all combined to hurt MLPs on a relative basis this week.
NRGY bounced this week after its dramatic drop last Friday. Other propane MLPs (FGP and SPH in particular) were beaten down this week, but NKA had the worst week. Within the sector it appears based on the winners and losers this week that investors are rotating into MLPs with more exposure to oil than natural gas (see OILT, MCEP and EVEP).
Year to Date Performance Comparison
MLPs are still up on the year, and on a total return basis are up more than 3%, which is fine. The gap between the winners and losers is very wide for so early in the year, around 50 percentage points (from CPLP at +26% to NRGY at -24%). Variable distribution MLPs (almost all fertilizer MLPs), are doing very well, driven by Rentech Nitrogen’s 53% price increase so far this year. Also, general partner holding companies are outperforming as usual.
Propane continues to dominate the bottom 5, as SPH joins NRGY and FGP, which have occupied the bottom 2 spots for most of the year so far. CMLP continued lower this week, as the drop in natural gas price so far this year is perceived to be hurting its business substantially. MCEP jumped into the top 5 this week, benefiting (I think) from a rotation away from gas and into oil heavy names, as mentioned above. Niska Gas Storage (NKA) dropped out of the top 5 with a big drop after earnings released this week indicated continued headwinds (press release).
More to come later this weekend. Lots to discuss, including data points this week from earnings and 2 equity offerings. Also, there was a new MLP initial S-1 filed by Foresight Energy Partners, a coal company backed by Carlyle.
The Alerian MLP Index finished January up 1.34%, the 13th positive January in the 17 years from when Alerian’s data starts, or 76% of the time. Not since 1999 has the MLP Index started the year with a positive month and finished the year with a negative total return. That may sound great, but consider that the MLP Index has gone up in 118 out of 192 months during that same span, or 61% of the time, and the MLP Index has only finished negative 4 years out of 16. So, MLPs are up most months anyway, January’s are just up a little bit more on average.
The outperformance for January relative to other months can be accounted for with two seasonal factors:
- First, the 4 best months for MLP prices have been the first month of each quarter (January: average return 3.5%, March: 2.4%, July: 2.4%, October: 1.5%). I believe this is a result of the distribution cycle. Most distributions are paid at the beginning of the second month of each quarter, so there is usually buying in advance of distribution payouts (and selling afterwards).
- Second, January specifically gets a boost from tax loss related selling in December and pent up buying from rebalancing at the beginning of each year.
While MLPs are up, it doesn’t feel great when the S&P 500 is up 4.4% during the same time, when on average the MLP Index has outperformed the S&P 500 in January by an average of 342 basis points since 1996. However, 2012 at -301 basis points is not the weakest showing ever; in 2004 the S&P 500 beat the MLP Index by 419 basis points. MLPs finished 2004 with 16.7% total returns, which I think we’d take this year.
This year marks the 5th January out of 17 that MLP Index has under-performed the S&P 500 for January. Again, this is more a virtue of the MLP Index usually outperforming the S&P 500 on any given month than a January-specific issue. In 2 of the previous 4 instances (1999 and 2002), the MLP Index finished with negative total returns for the full year, so that doesn’t tell us much.
Also of note, February has been the second worst month in terms of average price change over the years at -0.79%, so stay on your toes.
If You Ain’t First, You’re Last
I’ll have more on individual MLPs later this week, but Capital Products Partners (CPLP) is in the lead at the 1 month checkpoint with +28%, and Inergy (-22%) is being lapped by everyone. Those are two MLPs I don’t have in my portfolio and probably won’t this year, too volatile for me. The top performing MLPs each year tend to really hurt you stomach if you own them, because of how much they bounce around.
Unlike Ricky Bobby’s philosophy in the video above, I think the smarter play in the MLP space is to have more winners than losers. So, it’s nice to see CQP up 17%, EXLP up 16% and NKA up 15%, but I’m fine holding NGLS and ETE (each up 5% so far this year).
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. Long ETE and NGLS.
MLPs had a flat week, despite a sharp rebound in natural gas prices, and despite the Alerian MLP price index breaking through 400 for the first time ever. The Fed’s mid-week announcement that it would keep interest rates extra low through 2014, helped push MLPs and other assets higher through Thursday.
A sharp sell off Friday of 1.5% erased all gains for MLPs on the week. Friday’s drop was somewhat a result of broader market weakness, but also a result of 10 MLPs going ex-dividend Friday, including bell-weathers Enterprise Products (EPD) and Kinder Morgan Energy (KMP).
That broader stock market weakness Friday resulted from news of weaker economic growth than expected, with only 3.2% nominal growth, the slowest such rate since Q32009. FOMC action this week pushed treasury rates lower (10-year back below 2%), and gold higher.
The MLP equity offering pace slowed this week, with just 2 equity deals for under $500 million in gross proceeds. Also, of note, there have been no filings for MLP IPOs in January and no updates of previously filed S-1’s, so looks like the MLP IPO market is not going to be as hot as it was last year.
Natural gas’ 14.5% bounce may have legs given the announcement by Chesapeake ($CHK) on Monday. CHK announced that as a result of the lowest natural gas prices in a decade, it plans to curtail gas production by as much as 1.0 bcf per day in 2012 and reduce its operated dry gas rig count by more than 50% from 50 rigs to 24 rigs. Chesapeake plans to reallocate capital investment into liquids-rich plays (press release).
Dry gas shale plays like the Barnett Shale and Hayneville shale will be affected most by the strategic shift. CHK’s midstream subsidiary MLP, Chesapeake Midstream ($CHKM), has a contract mix with CHK that includes minimum volume commitments and fee-based payment structures. CHKM was nonetheless down 5.9% on the week, even with a 4.0% quarter over quarter distribution increase announcement on Thursday.
Other gathering and processing MLPs might be affected by future production curtailments from other producers in the Barnett and Haynesville shales. Since 2008, G&P MLPs have mostly shifted towards a fee-based contract mix, to avoid the double whammy of declining volumes and declining margins that they experienced in 2008.
Even with contract mixes that make all cash flow fee-based, G&P MLPs are exposed to volume risk. Contracts can mitigate that risk as well, with minimum volume commitments, but usually the minimum volume commitments are well below the volume management is expecting when the contracts are signed.
Other G&P MLPs that might see production curtailments akin to CHK’s around their assets include:
- Assets in the Barnett and Fayetteville shale areas
- 85% of CMLP’s volumes still come from Quicksilver Resources
- 95% of cash flow from fixed fee contracts
- Slightly less than 50% of cash flow from Barnett Shale
- EXLP has significant operations in dry gas areas, and depends on dry gas production to drive its business, so if more production cuts are coming, that should be a short term negative for EXLP.
Midstream MLPs with operations focused on liquids-rich areas where drilling is expected to continue to grow should be fine. The current environment is set to produce larger disparities than ever before between the winners and losers in the MLP space. The haves (crude and NGL-focused midstream players in areas of growing production) and the have nots (propane, natural gas storage MLPs, natural gas pipelines) are not usually this far apart.
(Clubber Lang’s prediction for fight against Rocky: Pain)
NRGY: My Prediction? Pain, Pro-PAIN
NRGY’s slow motion train wreck finally hit its climax Friday. Hopefully most of you got off the train a while back and were just rubberneckers as it unfolded. Propane distribution continues to be a challenging business, which is not new news. However, it seemed as though the propane MLPs were going to be able to maintain cash distributions and muddle through the challenging environment. That sentiment seems to have changed for the worse on Friday for NRGY, when the company added some comments to its announcement of a flat distribution for the quarter (my emphasis added):
“For the twelve months ended December 31, 2011, Inergy generated distributable cash flow of approximately 68% of the total cash distributions paid for the period. Market conditions, primarily in its propane operations and to a lesser extent in the Texas gas storage market, remain challenging. Although there are a number of factors that may impact its operations through the remainder of this fiscal year, a material improvement in distribution coverage is not expected. In light of these factors, management is conducting an evaluation of the operating businesses at Inergy, and is in the process of a major cost reduction initiative in its propane operations. In addition, management and the board of directors of Inergy are evaluating a reset of the quarterly distribution to a level that is supportable by the cash flow expected to be generated from Inergy’s businesses in the near term.”
So, in summary, cash flow last year was only 68% of distributions, things are not improving fast enough, the Inergy Midstream transaction was a marginal positive, but conditions didn’t improve fast enough in order to maintain its distribution. It seems like NRGY management is still holding out hope that some miracle will occur that will enable them to not reset their distribution, but the market is not so hopeful, as evidenced by the 23.6% drop in NRGY’s price Friday.
We’ve been watching this play out for a while. I started writing about it in middle of last year (see below), but the decline really started in Early May.
- July 22: “Propane Tank’s Empty” – recapping how Citi had downgraded the sector, sending NRGY down sharply that week.
- December 20: “Snowless in Boston: Impact on MLPs” – highlighted that weather was not going to save propane MLPs
On May 3, 2011, NRGY closed above $40 for the last time. The next day was the ex-date for its quarterly distribution, and May 10th NRGY announced earnings that disappointed. At the NAPTP conference in May, I remember how disappointed a few long term holders were in that earnings report, and the savvy ones got out soon after that earnings report, into June and July.
NRGY issued $324mm of equity at $36 in late May, and NRGY held flat for a month or so, until Citi’s downgrade and $31.50 price target report in mid-July. Weak earnings announcements in August and November, coupled with warm weather, helped assure that NRGY would not recover. NRGY has its earnings call Tuesday morning, so we’ll all get more color, and expected to hear some unhappy Q&A at the end of it.
Other propane MLPs aren’t doing well either. $APU announced earnings this week, and the results were ugly (press release). APU saw a 14% year over year drop in volumes, resulting from warmer weather (16% warmer than last year) and customer conservation resulting from high commodity prices (14% higher year over year increase in propane prices). The main difference is that even in the face of terrible operating conditions, APU has a 1.2x distribution coverage ratio, almost twice as much as NRGY. APU faces plenty of headwinds, but isn’t in distressed territory like NRGY at this point.
More earnings to come this week, buckle up…
26 MLPs announced distributions this week (16 increases, 10 flat). So far this quarter, 57 MLPs have announced distributions, 35 (61%) raised distributions. Average distribution growth has been 1.5% quarter over quarter. This week:
- CPLP, ETP, LINE, NMM, NRGY, NS, OXF, PSE, RNO, STON held distribution flat
- CLMT increased 6.0%
- EROC increased 5.0%
- MWE increased 4.1%
- ARLP increased 3.7%
- BBEP increased 3.4%
- PVR increased 2.0%
- WPZ increased 2.0%
- MMP increased 1.9%
- APL increased 1.9%
- SXL increased 1.6%
- DPM increased 1.6%
- RGP increased 1.1%
- HEP increased 1.1%
- SEP increased 1.1%
- EXLP increased 1.0%
- OILT increased 0.7%