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Tag Archives: MLPs
The Danger Zone: When Margin Investing Is OK (Not Right Now)
This post is going to be a little off the very beaten path of MLP talk. On a day when the fed says low interest rates will be around until 2014, the MLP Index hits fresh all time highs, and euphoria is back en vogue, people aren’t probably looking for me to tell them how great MLPs are for the 50th time. So, why not shake it up a bit and talk a little investor psychology?
Margin investing is risky business. If you buy a bunch of stock on margin, and that stock goes down, you will have lost money you didn’t really have. Like most of the investment wisdom I have, avoiding margin can be related in some way to a movie from the 80s. In this case, it’s Top Gun. Investing on margin is the equivalent of your ego writing a check your butt can’t cash, like the commander in Top Gun accuses Maverick of doing at the beginning of Top Gun.
Margin can be taken to extremes, and even out of the realm of your brokerage account. I remember an old boss, back when I was at Lehman Brothers, who espoused the virtues of using introductory credit card offers to borrow cash at 0% interest, and then plow that cash into MLPs, which he was able to collect distributions on that were around 7%. This was a guy that didn’t need the money, but was eager to take advantage of high yielding MLPs and low interest rates. I’m not sure what he was doing was strictly speaking legal, and I’m sure it didn’t work out well if he was still doing it in 2007 and 2008, when MLPs fell off a cliff.
But, like anything in investing and in life, there are grey areas. Sometimes margin is OK. For example, let’s say you were going to receive a lump sum payment at a date certain, like today (maybe an annual bonus or something similar). If you knew that in September, but waited until now to buy MLPs (or stocks), you would have missed the last 20%+ run up since early October. For the really level-headed, conservative investors out there, missing those big moves is fine. Its all part of investing, it evens out over time, trying to time the market is impossible, etc, etc.
But for me, missing that 20% move would represent a big missed opportunity, especially if I have conviction that certain MLPs are being discounted unfairly in the market (as tends to happen almost seasonally). I want to be able to jump on that opportunity in October, not in late January. Margin allows you to do that. If the money is going to be there in a few months, why not strategically use some margin? The worst that can happen is you pay off the margin with money you’re expecting in January anyway. In this case, you are metaphorically writing a check, and having the comfort of knowing your butt can cash it if need be (how is that for an uncomfortable image).
Also, is that same level-headed investor agnostic to valuation and content to plow that lump sum into MLPs (or stocks) at these prices today? Investing after a huge move is probably when risk is highest, not the other way around, especially the way the market oscillates these days. But there are volumes of books by very smart people who have run the numbers, like Ken Fisher, who say that the key to investing successfully is to be fully invested all the time. Because if you had a lump sum of cash and did not invest in today, even when prices have moved 20% in a few months, you might miss the next 20% move from here, and if stocks keep going up, your panic level rises even more, and you may end up investing at an even higher peak.
I think there is a grey area on that point as well. Loading up on stocks all the time is probably not the best strategy, conversely trying to time the market by waiting for the exact right moment to buy is probably a losing strategy. The magic formula is somewhere in the middle. There is certainly a point when euphoria can get ahead of fundamentals and you probably want to avoid those times. There is also a point when despair peaks and it might be a good time to buy, like November 21st 2008, when the MLP Index troughed at 152.68. Clearly early October’s trough of 331 on the index was one of those times as well.
HINDSight is always 20/20, its the foresight that causes problems with margin investing and regular investing. The question for today is, have we entered the danger zone for MLPs, and would you feel comfortable putting massive capital into the market at these prices? One thing is for sure, don’t use naked margin to buy MLPs today. Good luck out there.
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.
Snowless in Boston: Impact on MLPs
In stark contrast to last winter, which resulted in 6-ft high snow banks on either side of my driveway by the end of February and cabin fever rivaling that of “The Shining”, the Boston area has yet to have any snowfall in November or December this year. If you live in some other part of the country, you may have missed this, but the weather nationwide (and specifically in New England) has been very mild compared with last year. At the risk of jinxing what has been a very pleasant few months with no snow shoveling or ice scraping, lets try to quantify just how mild it has been and what that means for MLPs.
(heeeeere’s Johnny!)
According to heating degree days data I sifted through on the website of the National Weather Service (data found here), so far, the 2011 winter (loosely defined by me as starting at the beginning of November) has been the mildest on record since 2006. Heating degree day (HDD) is a measurement designed to reflect the demand for energy needed to heat a home or business. It is derived from measurements of outside air temperature.
There have been 894 heating degree days nationally from the beginning of this year November through December 16, 10.5% less than the average of the previous 5 years over the same time period (999 HDDs), and 15.8% less than last year when there were 1062 HDDs.
The difference is even more pronounced in Massachusetts, where there have been 1035 HDDs thus far, 20.5% less than the 1302 HDD average the prior 5 years, and 23.1% less than the 1346 HDDs last year. The West and Rocky Mountain regions of the country are colder than normal, but New England is far warmer than normal. Just last week, according to the EIA, New England averaged 43.0 degrees, 8.1 degrees warmer than normal.
A milder winter means less demand for and consumption of heating oil, propane, natural gas and electricity. That will likely mean further deterioration of operating results from the propane MLPs, at least in this current quarter. It can mean lower demand on the margin for coal from utilities. It can also be one more headwind facing natural gas prices.
Last year was a very cold winter, which helped reduce excess natural gas storage a bit and helped to keep natural gas prices from falling below $4.00 for most of 2010 and early 2011. But without any help from weather and with ever-increasing production from liquids-rich gas plays (gross production up 6.9% year over year), natural gas storage levels ballooned. Working natural gas in storage, according to the EIA’s weekly report, is currently 3,729 bcf, 4.3% above last year, and 10.3% higher than 5 year average level of 3,382.
This combination of increased supply and decreased demand has sent natural gas prices way down. Spot Henry Hub Prices broke $3.00 in late November and are hovering around $3.15 per mmbtu currently, compared with a 5 year average price of $5.66 per mmbtu and a 2010 average price of $4.37 per mmbtu.
So, when thinking about which MLPs will be the winners in 2012, proceed with caution when considering placing bets on some of the MLPs that lagged in 2011 (like natural gas storage MLPs and propane MLPs). For those MLPs to revert to the mean and trade more in-line with other MLPs again, they will have to overcome substantial fundamental headwinds.
Names like SPH and NRGY with significant concentrations of assets in the Northeast should have weak results this quarter. In years past, this sort of weather would have been fairly catastrophic for GLP, which only has assets in New England and began its MLP life as predominantly a heating oil wholesaler. However, over the last few years, GLP has diversified its operations, not geographically, but away from heating oil and into transportation fuels. On the margin, I would bet that gasoline demand and convenience store sales are counter cyclical to heating oil demand, but this current quarter will either confirm or refute that hypothesis.
The only game-changer in all of this would be drastically increased domestic economic activity, which seems unlikely. I am certainly not ruling out a slightly improving economic outlook for 2012, but nothing that would stimulate massive energy consumption increases. For 2012, the winners will likely be those with operations tied more closely to the growth in supply of higher margin crude and NGL production. More on 2012 trends and expectations in future posts.
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 GLP.
Week Thoughts: Deck the Halls with MLP Equity
Another week, another billion dollars of MLP equity issued. Its sort of like when a month ago, I accidentally placed the same large Christmas gift order from Amazon 6 times (I never got to a confirmation page, so I just kept clicking, never a good idea…). Over the course of the next week following the order, the boxes (filled with the same stuff) kept piling up. We eventually printed all the return slips and made several trips to UPS to send the boxes back, but for a while it felt like it would never end (and it confused the hell out of my young kids, as if Christmas wasn’t confusing enough already).
The MLP equity deals seem like they won’t stop either. There were 4 this week: 2 IPOs (MEMP and RRMS) and 2 follow-ons (EPD and NS), for a total of $1.035 billion in gross proceeds. Nonetheless, MLPs had a decent week, continuing the recent trend of barely flinching in response to mountains of new paper. The MLP Index finished the week flat, compared with a slightly positive week for the S&P 500, despite back to back 20+ point S&P 500 days to end the week as the not so bad economic news here remains in conflict with the mess in Europe.
The two follow-ons traded well, particularly EPD, which closed Thursday above issue price, despite strong market headwinds that sent the MLP Index down 1.3% (although EPD represents a fairly large percentage of the MLP Index, and it was down from the prior close more than 2%). The IPOs both traded poorly, although RRMS was at one point up 4.5% before drifting all the way back down to its IPO price.
Poor IPO trading is evidence of some fatigue in a IPO market that has been very busy this year. Its not over, either, with 2 more IPOs set to price next week for a combined $428 million in planned gross proceeds. With the late flurry of IPOs, this year will be tied with 2007 for the most active ever for pure MLPs (i.e. not including GP holding company IPOs that proliferated in 2006) with 13 total MLP IPOs. 6 of those IPOs will have come in the 4th quarter, and 4 in the last month, tying this month for the most active 30 day period in the history of the sector, only surpassed in gross proceeds by the October / November period of 2007, as shown in the table below.
If the 2 announced IPOs get done next week at the midpoint, a total of $4.6 billion in equity will have been raised in the 4Q2011, more than twice as much as was raised in 3Q2011, and in-line with 1Q2011. I’ll have the full year stats in year-end wrap up posts planned for early January, but it’s safe to say that 2011 will go down as the largest equity year in the history of the sector, with almost $20 billion in equity raised. In a favorable market climate, MLP equity raised should continue to grow year after year, as the sector market cap grows and distribution growth drives an ever increasing need for equity capital as a result. Obviously the MLP sector can’t grow forever, but record equity issuance years should be no surprise going forward for the next few years.
These record years are not much more than confirmation that the market is open for MLPs, which is a positive indicator for MLPs in 2012, as MLPs generally don’t raise and spend capital unless its for capital projects with attractive returns. A glut of equity issuance usually portends growth in the coming quarters for MLPs. From all indications via recent management presentations, there are some MLPs with assets in the right basins that are limited in their growth only to the extent they can access capital.
The 2 IPOs that are slated to price this week are Mid-Con Energy Partners (MCEP) and Inergy Midstream (NRGM). MCEP is an oil rich E&P MLP backed by Yorktown, priced at the same range and distribution as the last two E&P MLPs, LRE and MEMP. Both of those settled around $19 per unit, but with its oil focus, maybe MCEP can price higher.
NRGM is the natural gas storage and transportation subsidiary of Inergy. NRGM has just one incentive distributions rights tier (50%) that starts immediately above the initial quarterly distribution, and NRGM does not have any subordinated units, so doesn’t seem too unitholder friendly. We’ll see if the 7.4% yield at the midpoint is enough to compensate potential IPO investors for the slanted structure.
Winners and Losers
RNO and TLLP biggest winners this week. TLLP released some positive guidance, no obvious news piece to justify the 11.8% move for RNO. It is interesting to note that another coal name, OXF, was on the other end of the spectrum this week, down 8.1%, also on no obvious news. STON continued to recover from last week this week (up 3.8%), and BWP finally started moving up, after largely sitting out the recent move by the MLP index. It appears investors are searching for some value here with names like RNO and BWP, which look cheap after the run the rest of the sector has had of late.
Bunch of News Again this Week, Highlights:
EQT to File for MLP IPO in early 2012 (press release)
- Would own portions of the assets of Equitrans, LP, EQT’s interstate pipeline subsidiary.
- EQT will be GP, which would own IDRs, as well as a substantial portion of the MLP’s common units
- EQT will use the funds to further accelerate Marcellus development
- MLP will focus on providing transmission and gathering services to producers in the Marcellus
Southern Union Shareholders Approve ETE Merger (press release)
- 98% of the shares voted in favor of the deal, votes represented 80% of total outstanding shares
- Expected to close in first quarter of 2012
Cardinal Gas Storage (Joint Venture Partially Owned by MMLP) Announces Storage Project (press release)
- 10 year agreement with Shell Energy to construct a depleted reservoir storage facility
- Expected in service in 2013, with design capacity of 17 bcf
- MMLP also announced $25 million of additional capacity on its revolver this week
Regency Energy Partners and JV Partners Announce New Processing Facility (press release)
- 2 plants to be built to process natural gas from Bone Springs and Avalon Shale in West Texas
- 25 mmcf/d refrigeration plant and 100 mmcf/d cryogenic processing plant
- $100 million cost ($33.3 million each to RGP, APC and CHK)
- Full facilities complete by 4Q2012
Enbridge Energy Partners To Expand Bakken Crude System (press release)
- $145 million cost
- Expands capacity at Berthold Terminal by 80,000 barrels per day and rail car loading facility
- Project is in addition to $480 million Bakken Expansion Program and Bakken Access Program
- 70% of rail capacity committed
- Project to be completed in early 2013
NuStar Prices Equity Offering at $53.45, a 4.1% Discount to Prior Close (press release)
- 6.0375 million units, $322.7 million in gross proceeds
- NS had not issued equity since May 2010, but unfortunately for unitholders, that deal in 2010 was priced at $56.50, so things are moving the wrong direction there.
Enterprise Products Prices Equity Offering at $44.68, a 2.7% Discount to Prior Close (press release)
- 10.35 million units, including overallotment, raising $462 million in gross proceeds
- Attractive pricing for EPD appears to be the driver for the timing of this deal.
- After 3 equity deals in 2010 for the largest MLP, EPD had not issued equity this year
- Many were expecting an offering at some point in early 2012, but despite the thin discount, EPD traded well in the aftermarket.
Inergy (NRGY) Announces Cash Tender Offering (press release)
- NRGY will purchase up to $300 million in principal of its 6.875% notes due 2021 and 7% notes due 2018
- Contingent on successful close of NRGM IPO
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 MMLP, EPD, NRGY.