MLP Market Update
Commentary on Master Limited Partnerships

Monthly Archives: December 2011

Published
Dec 27th, 2011

Category:
MLP Market Post

The Aristocrats! MLP Edition

2011 appears to have been the year of the aristocrats.  Our country’s aristocrats, the 1% top earning Americans, have garnered lots of negative press in the second half of the year.  And this month, I am reading in several corners of the internet about how well so-called “dividend aristocrats” are doing relative to other large cap stocks, most notably this post at the Wall Street Journal and James Bianco on The Big Picture blog.

A common index for people to point to when discussing such stocks is the S&P 500 Dividend Aristocrats, which consists of the S&P 500 members that have increased their dividends every year for the last 25 years.  That index currently consists of 51 members, mostly household name type companies such as Walmart, Exxon, Colgate-Palmolive, McDonald’s, Clorox and Coca Cola.

So far in 2011, through 12/23/2011, the Dividend Aristocrats Index has risen 5.8% not including those dividends compared with the S&P 500, which has been roughly flat.  The average dividend yield of the constituents of the Dividend Aristocrats Index is 2.8%.

What would a list of MLP distribution aristocrats look like, and how would it have performed?

First, given that energy MLPs in their current form have only really been around since 1986, there are not very many MLPs that have been around to pay distributions for even 15 years, much less 25 years.  So, to make a distribution aristocrat list, the criteria for inclusion would need to be relaxed a bit.  To make it very simple, for my MLP list, I’ll include MLPs that have grown distributions each year for the last 10 years.  There are 11 such MLPs, as shown in the table below.

That simple criterion excludes those MLPs that went public less than 10 years ago, even if they have grown distributions consistently since their IPO.  11 out of the 50 MLPs included in the MLP Index is slightly more than 20% of the index constituents, but 52% of the MLP Index’s weighting.  In case you were wondering the longest streak of annual distribution growth of MLPs that are not in the Alerian MLP Index are HEP and STON, each with 7 straight years, followed by TLP at 6 years.

The table below highlights the results over the years.  I left out the MLP distributions, because showing these numbers on a total return basis just isn’t fair given by how much MLPs have outperformed stocks on a total return basis over the years, as discussed here.

The results are not surprising, given that large cap MLPs have outperformed in 2011, and most of the list is large cap MLPs.  The general rule that gets thrown out about dividend aristocrat stocks is that they outperform in down markets and under-perform in up markets.  That appears to be the case in 2007 and 2008 for both stock aristocrats and MLP ones.  But in 2006, 2009 and 2010, all strong years for stocks and MLPs in general, the aristocrats faired very well also.

Looking at these numbers, it’s hard to argue against owning aristocrats vs. regular stocks / MLPs, over any time period.  Companies that are disciplined about maintaining and growing distributions can’t afford to waste their cash flow or earnings on low-return or no-return projects.  Capital discipline is extremely important, particularly in an era where capital is so cheap and the temptations to squander capital are rampant.

What do you call your act? I call it The Aristocrats!

 

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. 

Published
Dec 24th, 2011

Category:
MLP Market Post

MLP Week Thoughts: Pretty Pretty Pretty Good…

If you don’t get my title this week, then you must not have watched much Curb Your Enthusiasm with Larry David.  If that is the case, I feel sorry for you.  Here is a mashup of the times he used the above catch phrase.

Almost everything globally that has a floating price was higher this week, MLPs included.  The few exceptions included: Silver (down 2%), Chinese stocks (Shanghai Index down 0.9%), natural gas (down 0.4%) and government bonds (TLT down 3.3%).  Everything else had a pretty pretty pretty good week…

The domestic stock market reacted positively to the 489 billion Euros worth of 3 year bank loans at 1% to 500+ banks that was announced by the ECB early in the week.  Then the market further rallied (on weak holiday volume) after the initial unemployment claims surprised in a positive way for the second straight week.  MLPs under-performed the S&P 500 this week, but are still far ahead going into the last 4 trading days of the year.

If MLPs have another week like last week again next week, the index will be at all time highs, last reached in late April of this year.  As I’ve noted before, the peak of the index means very little, considering it doesn’t include distributions.  Looking back at how the MLP Index has performed compared with how that same Index has performed including distributions in the chart below, you can see how important distributions have been, accounting for more than 70% of the return of the Index from inception through Friday.  The Total Return Index is at all time highs currently, having surpassed the April 28th peak back in early December.

(click to embiggen)

Either way, the bottom line is, MLPs have performed very well lately, defying gravity and other risk assets.  It is becoming harder and harder to find MLPs that look cheap, particularly when looking at the large cap MLPs that have led the sector higher.  I generally have a fear of such heights and may be layering on some puts next week to protect against another pullback in 1Q 2012.  Despite the above chart of miraculous growth since 1996, it doesn’t hurt to play defense when things get frothy (beyond the put premiums paid, which hurt a little).

If you do consider buying puts or shorting the sector, however, you should be aware that January has historically been the strongest month for MLP returns by far.  January MLP Index returns have averaged 3.6% over the last 16 years, compared with 0.52% average for all other months.

Good luck, that’s all from me for now, I have to get to sleep so I can celebrate Christmas with my kids at 6am.   Its not that they are going to wake up early for Christmas, they wake up at 6 (or earlier) every single day…should be good times, even with bleary eyes.  By the way, this is my 100th post.  Thanks to everyone who has read it and encouraged me to continue posting since my first entry back in December 2009.

Winners and Losers

Recent IPO LRE was the biggest winner this week, the beneficiary of some glowing initiation pieces.  Another recent E&P MLP IPO, Memorial Production Partners (MEMP), was one of the few MLPs that was down on the week, which is interesting because it is a similar story to LRE, so perhaps when MEMP research comes out in a few weeks, MEMP will shoot up as well.  NKA has been the worst performing MLP by far in 2011, and it fell further behind this week.

News of the (MLP) World

Although it was a light trading volume week and capital markets are closed for the rest of the year, there was plenty of news.

WPZ Announces Acquisition of $750 million Marcellus Gathering System (press release)

  • WPZ had previously announced (12/1) that it was engaged in exclusive negotiations to acquire the assets from Delphi Midstream
  • Funded with $300 million cash and 7.5 million WPZ units issued to seller

LINE Announced Better Than Consensus 2012 Guidance (press release)

  • Announced $880 million capital program, focused on liquids plays (53% of capital program focused on Granite Wash)
  • LINE expects production to grow more than 40% in 2012 to 520 mmcfe/d
  • EBITDA guidance for 2012: $1.175 billion, not including any potential acquisitions

Copano and Magellan Announce Eagle Ford Joint Venture (press release)

  • 100,000 barrels per day line that will deliver Eagle Ford condensate to MMP’s Corpus Christi terminal
  • $150 million cost, shared 50/50
  • Expected to be fully in service by 1Q 2013
  • Returns for the project expect to be around 20%

“ETF in a Box” Firm to Help Yorkville Advisors Launch MLP ETF (press release)

  • Exchange Traded Concepts (ETC) is a firm that helps any firm launch its own ETF within 75 days (website here, http://www.exchangetradedconcepts.com/)
  • ETC uses its exemptive relief approval to work with ETF issuers
  • Certainly won’t be the last MLP ETF we see in the next 12 months, the question is will any of them gain enough assets to be viable or will most end up as Zombie ETFs
  • It will be interesting to see if this ETF has any different structure than the Alerian one that would make it attractive (because it certainly won’t be competing with Alerian’s marketing budget

EVEP Announces new CEO (press release)

  • Mark Houser is being promoted from COO to CEO, remains President
  • John Walker steps down as CEO, retains title of Executive Chairman

EPD and ENB Announce Open Season for Seaway (press release)

NRP Announces Acquisition of 3,600 mineral acres in N. Central Oklahoma (press release)

  • Undisclosed purchase price
  • Funded with cash, expected to be accretive in 2012

 

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. 

Published
Dec 23rd, 2011

Category:
MLP Market Post

MLP Performance Review: Is It Safe?

The MLP Index is on track to post a 2011 price change of around 5% and a total return of more than 10% (factoring in distributions).  It will mark another year of MLPs outperforming the S&P500, the 11th time in the last 12 years that has happened (2008 goes down as a tie, with both indexes down 37% on a total return basis).  That kind of repeated outperformance by the MLP Index is a result of the secular growth story behind the assets they own and the hunger for yield from an aging population (caused in some part by low rates).  But another major factor is the MLP structure and the high payout ratios of MLPs that force management teams to be prudent stewards of the capital they oversee.

It has not been smooth sailing for MLPs this year, however, and there were a few corrections and scares along the way that flushed out some of the weaker MLP holders, providing opportunities for long term holders.  The chart below shows the performance of the MLP Index with each of the 5 years plotted across one calendar year.  Looking at the 2011 line, there were periods during May and August, when it seemed the index was tracking 2008.  But the 13%+ rally this 4th quarter looks more like 2009 and 2010 than 2008.  However, also noteworthy is that the last time MLPs had a somewhat complacent year amidst a weak economic backdrop (2007), the following year turned out pretty pretty bad.

Also, the year to date MLP Index price change of around 5% is somewhat deceiving.  An equal weight average of the Alerian MLP Index members would have been up only 0.2% so far in 2011.  The 10 largest MLPs, which collectively account for 59.3% of the MLP Index, have gone up on average 9.4% so far in 2011, compared to -2.0% for the other 40 members of the benchmark Alerian MLP Index.  Large cap MLPs were the best performers this year.

All year, investors seemed to be struggling with the same question Laurence Olivier’s dentist asks Dustin Hoffman’s character repeatedly in the Marathon Man (video below, starting around 1 minute mark): Is is safe?  And it appears that many investors determined it wasn’t safe, and were not participants in the fourth quarter light volume melt-up.

Is it safe? Hoffman’s character doesn’t know the answer, and neither did anyone else this year.  Large, famous managers were confounded by the market this year, as outlined in this post by Josh Brown.  Some very famous players even folded up shop (like Soros).  For them and for the rest of us, much of the year we felt more like Hoffman’s character, tortured by daily swings up and down, numb to the pain of what seemed like an endless stream of disappointing  economic data-points.

In the end, the year turned out fine and it was safe, but many investors have given up on the market in the process, or they are waiting to time their entry for when things seem more “certain”.  That mountain of cash on the sidelines remains.  If history is any guide, when it finally appear “safe” for invstors to jump back in the markets, it will be just when the market is no longer safe.

 

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.