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Category Archives: MLP Market Post
MLP Week Thoughts: January Defect
MLPs had a rough week, down 1.8% in a week that saw the S&P 500 rise 0.9%. After almost a month without an MLP equity offering, there were 3 equity deals this week for a total of more than $900 million, including a $611 million offering from LINE (only the 3rd $600mm+ follow on deal ever). The brief respite from equity offerings was very nice, almost like I imagine walking on the moon might be without as much gravity to weigh you down.
A little bit of gravity certainly re-entered the MLP market, and (not coincidentally) a heavy dose of reality re-entered the natural gas markets. Natural gas futures were down 14% this week, oil futures were down 2.6%, both helping to drag MLPs down for the week, and down for the year so far. So much for the January effect (MLPs have averaged more than 3.5% returns in past January’s), at least so far.
Natural gas traders seem to have finally given up hope of any drilling slowdown to reduce supply or colder weather to provide a jolt for demand. Natural gas futures are down more than 40% from this time last year, when the unusually cold and snowy weather was doing its best to reduce natural gas in storage, and some people were still expecting drillers to slow down given low prices. Natural gas prices have been very similar to interest rates on Treasuries, in that people are always saying that both can’t get much lower, and yet they always do. The takeaway here is that taking a directional bet on something just because its low relative to history is not advised.
So far in 2011, the MLP Index started with 3 positive days in a row, followed by 5 straight down days, then a slight tick up this Friday. See below for a year-to-date chart of the MLP Index compared with the S&P 500. As you can see, the MLP Index is now down for the year, but no one is feeling sorry for MLP investors, as the index remains 13.8% above its close at the end of the third quarter, and 22.6% above its 12 month low (August 8th).
Expect a few trends to continue through distribution announcement season, which started this week. Expect to see propane MLPs, natural gas storage MLPs, and large cap MLPs to continue to lag. Expect small caps, general partners and the large caps with sector-leading growth to continue to perform well. Natural gas is going to continue to weigh on the sector as its dramatic moves lately (and over the last few years) start to get more press.
What are the catalysts that can get natural gas to stop falling before LNG export solutions start to come online in 4 years? Maybe natural gas as a transportation fuel will start to gain some momentum as a result of more press. Maybe ethane and NGLs demand will start to decline in the face of growing NGL supply, leading to lower NGL prices and a slowdown in drilling (demand hasn’t slowed yet, more crackers are being built to keep pace with growing ethane supply). Maybe the weather will bail out natural gas like last year, but clearly that hasn’t happened so far this year. In the absence of one of those catalysts, its hard to see how natural gas prices recover much in 2012.
There were 4 distribution announcements this week, 2 increases ($GEL and $PAA) and 2 maintains ($CPNO and $PNG). Expectations are high for distributions in 2012 for the sector as a whole, with many MLP growth projects that were paid for with equity offerings in 2011 are set to come online and start contributing to MLP cash flow.
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.
Weekly Winners and Losers: Natural Gas Deflating Fast
The story of the week was natural gas dropping 14.4%. That, combined with almost $900 million in equity issued by MLPs, helped keep MLPs down relative to stocks. Variable distribution MLPs, particularly fertilizer MLPs had a good relative week, particularly RNF (up 5.1%), which benefits from lower natural gas prices as its primary raw material cost.
That drop in natural gas hasn’t helped the retail propane MLPs, which already had plenty of fundamental weaknesses trending against them. Propane MLPs were already facing conservation and declining demand from switching to natural gas, plus warmer 4Q weather. Weak natural gas prices would seem to have a further negative impact on propane demand. $APU and $FGP were the biggest losers in propane this week. $CMLP issued $107mm of equity, which helped it earn a spot on the loser list this week, down 6.5%. $PAA and $MMP also make the list, as we are seeing further rotation out of large cap MLPs that had great 2011′s. Royalty trusts had a rough week with the declines in commodity prices, but noticeably absent from the bottom 5 below are the E&P MLPs, which held up ok this week, even with a massive equity deal out of $LINE.
The winners were all not members of the Alerian MLP Index, which is a continuing trend as investors appear to be finding value in the MLPs that did not benefit from the surge in MLP ETF money in 2011. CPLP was the bright spot this week, after an upgrade from Wells Fargo on Monday, and a positive press release this morning on extension of charter agreements.
Year to Date
MLPs are off to an uncharacteristic slow start to the year, but variable distribution MLPs and GPs are doing well so far.
Small caps continue to outperform, large caps (with refined product and crude assets it appears) are lagging, along with propane, as mentioned above.
My week thoughts post will be out later this weekend. Enjoy the holiday.
MLP Week Thoughts: Quick Start Before Flashy Friday
MLPs got off to a solid start to 2012, with the Alerian MLP Index finishing the first week up 1.1% and making new all time highs the first 3 trading days, before a dramatic but ultimately small drop on Friday. The MLP Index lagged a bit compared with stocks and gold for the week, each of which seem to move in the same direction these days. The new role for MLPs of late has been a defensive one, so in a week when economic data points are o.k. and stocks are up, MLPs are going to lag.
January historically has been the best month for MLPs, with a median return of 3.5% over the last 15 years. On an individual retail investor level, you can understand why, beyond annual portfolio rebalancing. There is a tangible benefit to waiting to buy MLPs until the calendar year ends. If you buy an MLP or rotate from one MLP to another in mid-December, you have to fill out an additional K-1 for this year’s tax return. If you wait until January, that additional K-1 (and any tax impact from the sale) gets delayed an extra 12 months.
If you were watching MLPs trading the last few days of December, you could see the pent up demand building. It was easy to buy names like NKA, OXF and BWP as they stumbled into the end of the year, even as the MLP Index and leaders from 2011 marched higher. But all of a sudden this week, the laggards from the last month gapped up. See below 30 day chart for NKA, that looks very similar to the others above.
For the large cap MLPs (and therefore for the MLP Index), this first week was a continuation of the last 90 days (with the exception of Friday, more on that below). After bottoming on October 4th MLPs have been on fire, up nearly 20% as a sector. The chart below highlights how many days have been positive for the MLP Index across various time periods. It shows that in the 65 trading days since October 4th, MLPs have been up 68% of the days.
Above 65% over any substantial amount of time is unsustainably high when compared with the last few years. In 2010 and 2009, the MLP Index was positive around 60% of the trading days, during two very strong (and probably not repeatable) years. The bottom line is don’t expect this euphoric pace to continue for the next 12 months.
Drop and Pop – MLP Mini Crash
At around 11:30 am on Friday, several large cap MLPs began selling off on large volume. Can’t really be sure what happened, but it appears a massive (and possibly erroneous) sell order, potentially in Plains All American, triggered the selloff. PAA dropped more than the other significantly affected MLPs (like EPD, EEP, MMP). That massive sell order triggered stop losses and triggered program sell orders in related MLPs, sending other large caps down sharply for a half hour or so. PAA went from being up 0.2% on the day at 11:30 to down 6.0%, a drop of more than $4.50 per unit in a matter of a few minutes. PAA recovered and finished the day down only 1.3%.
The mini crash received a lot of press for something that happened in the MLP sector, including the two articles below.
- Article at Financial Times with a quote from me – Energy Security Sell-off Worries Traders
- Article at WSJ’s Market Beat - Curse These Sausage Fingers: Plains All American Pipeline Edition
It was fascinating to see the situation unfolding on Twitter and Stocktwits. More people are following the MLP sector than ever before, which becomes very clear when something like this happens, and all of a sudden for a few minutes, everyone is talking about MLPs (or at least more than I thought paid attention or cared). I welcome the ever growing awareness of MLPs in mainstream investing media, but am also wary of too much excitement pushing values up too high too fast…
Related:
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.