For the week 57 out of the 70 MLPs I track had positive weeks.  The biggest winner this week was Holly Energy Partners (HEP), driven higher by surprisingly solid results (especially volumes in its third party refined products pipeline segment) and visibility into more drop down acquisitions.  Other winners included a rare positive week for propane MLPs, with 2 in the top 5 (Suburban and Amerigas).  Coal companies dominated the short list of losers this week, with Oxford Resource Partners dropping more than 10.8% to lead the losers.

Buckeye (BPL) was another notable loser this week, falling 6.4% this week, following last week’s $250mm PIPE equity offering, which was priced at an 8% discount to the prior close. Read more about BPL at the Wall Street Journal’s Deal Journal Blog, which highlights how BPL is responding to S&P’s negative outlook: by making more acquisitions.  BPL hopes that funding its latest deal with equity will help its case.

Year to Date

Even with the strong week, MLPs (up 4.7%) continue to lag other risk assets, but are in very good shape with distribution season complete and earnings season almost over.

In terms of individual MLPs, small caps continue to lead the way.  HEP and EXLP joined the top five, replacing AMID and CQP.  The composition of the bottom five is almost the same as last week, with just one change: EROC has been replaced by BPL.  Variable distribution MLP Rentech Nitrogen (RNF) had another strong week (up 5.4%) and continues to lead the industry overall with a 55% increase year to date.

MLPs appear to have caught a bid here relative the market, and with earnings season almost finished, catalysts going forward will be  on commodity price changes (particularly NGLs, which have declined substantially year to date), equity offerings and the broader market’s swings.  MLPs are well positioned to continue to perform well, but the action in MLPs this year is very similar to that of last year, which saw an intra-year 20% correction, so be on the look out for signs of another correction.

Other News of Note

Same Story, Different Quarter for ETP

ETP reported results this week, including adjusted EBITDA of $479 million, slightly less than consensus expectations.  ETP continues to struggle to drive earnings from its volume challenged instrastate and interstate pipeline system.  Intrastate volumes were down 0.4% year over year and interstate volumes were down 2.7%.  ETP’s propane operations not surprisingly did not perform well either, as warmer weather and high wholesale propane costs cut into volume and margins.

While those negative trends continue, ETP was propped up this quarter by excellent midstream and NGL segment growth and margins.  ETP continues to focus new capital expenditures on processing and NGL-focused assets in Texas, and is securing those projects with fee-based contracts where it can.  ETP’s Lone Star JV will construct its second NGL fractionator at Mont Belvieu with 100 mbpd of capacity, estimated to cost $350 million and be in service in the 1^st quarter of 2014 (press release). ETP is also planning to expand its Rich Eagle Ford Mainline pipeline and build another processing facility in the South Texas (press release).

With NGL economics propping up declining margins on other segment, ETP should be able to muddle through until it can restart growth with drop downs from the Southern Union merger.  I expect distribution growth to restart as soon as the next distribution, after 14 consecutive flat quarterly distribution payments.   The situation is improving for ETP unitholders, but the real beneficiary going forward when ETP issues the massive amount of equity it will need to complete the drop downs will be ETE (we are long ETE).

New Atlas MLP gets Approval for Spin Off

Atlas Energy, L.P. (ATLS) announced formal approval for distribution of Atlas Resource Partners, L.P.  (will trade on the NYSE under ticker ARP).  See all the details at this press release or read the full registration form 10 here, but the idea is that ATLS will distribute 5.24 million units (19.6% of the L.P. units of ARP) on a pro rata basis to its current unitholders, creating a separate public company that will start trading on March 14.    ARP will have incentive distribution rights with a maximum tier of 50% (high for an E&P MLP).  ARP will have 187 bcfe of net reserves that includes working interests and overriding royalty interests in wells in the Appalachian Basin, Illinois Basin and Rocky Mountain Region.

ATLS is very experienced in creating webs of publicly traded companies with confusing org charts.  ATLS used to be the ticker symbol for Atlas Energy, Inc (before that it was called Atlas America, Inc.), the parent company of Atlas Energy, L.P., which trades under the ticker symbol ATLS today.  The current ATLS owns the general partner of Atlas Pipeline Partners (APL), and the prior ATLS at one time had an E&P MLP called Atlas Energy Resources, LLC that traded under the symbol ATN, that went public in 2006, before it merged with its parent ATLS in 2009.

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.

In other news, I’ll be writing a weekly column for equities.com on MLPs.  I plan to publish every Thursday there, and will continue my weekend posts here.  My first column, released today, was a review of where the MLP Index is and how many all-time highs have been reached over the years.

Excerpt:

In 2012 to date, the MLP Index has closed at all-time highs 6 times, and 12 times for the total return version of the index (including the distributions).  At the current rate, the MLP Index are on pace for 50 closes at new all-time highs this year (100 for the total return version of the index).  Each of those would be close to the record for all-time high days in a single year.  The chart below shows the number of days in each of the last 16 years that the MLP Index closed at all-time highs.

Click over for the rest of the column here.

Weekly post coming tomorrow night.  Thanks as always for reading.

MLPs had a boring week as well.  There were some positive project announcements out of PAA, BPL, CPNO, and BWP.  EPD issued $750 million in notes due in 30 years at a 4.85% fixed interest rate, lowering its already industry leading cost of capital.  A judge in Delaware made headlines and interesting quotes in delaying his decision on the proposed temporary injunction filed by El Paso shareholders in the acquisition by Kinder Morgan, Inc.   EV Energy Partners issued an upsized equity deal that was gobbled up by the market, and traded well in the aftermarket.

In the absence of a catalyst, correlation crept back into the market this week.  The MLP Index tracked the S&P 500 closely, and finished about where it started the week.

In looking at the winners and losers on the week, CLMT and FGP went from bottom five last week to top five this week, and SXL recovered after selling off in January.  Another crude player, RRMS was also in the top 5.  MEMP, which is an upstream MLP with 98% of production from natural gas, sold off hard this week, as there is a growing disparity among upstream MLPs that either have or don’t have natural gas exposure.  Also, coal MLPs had a rough week, which landed OXF and ARLP in the bottom 5.

Year to date, MLPs are trailing the S&P 500 by a lot early on.  But the comparison below doesn’t include distributions, which narrow the gap on a total return basis.  This year, I am not alone in thinking the MLP index might fail to outperform the broader market, but I expect the winners in the sector to do very well.

MCEP, which is an upstream MLP that gets almost all of its production from oil, jumped to the top after back to back strong weeks on the back of oil strength and I guess continued discovery of this MLP that just went public in December.  Propane MLPs have staked out the bottom 5, and I expect them to stay there for the rest of the year, barring some massive recovery in propane fundamentals or some MLPs in other subsectors blowing up in some way.

Anyway, that’s my snap take on the week that was in the MLP space.  We’ll take boring weeks, with incremental positive organic growth project announcements and just one equity deal.  Who knows what will happen next week.  Maybe there will be more fireworks as natural gas edges closer to sub-$2.00, and we get closer to seeing dry gas c-corps running out of capital.  Maybe there will be a big fracking legislation scare.  Maybe we’ll have $1.0 billion of equity issued.  Maybe, maybe not.

For now, I’m going to go out and enjoy the mid-50s weather in Boston in early February.

So, there is a constant cycle that plays out in MLPs, buying leading up to distribution payments, selling afterwards to adjust for paid distributions, then slow build up again.  I’ve written about at length, and you can read more about MLP seasonality here and here.

Distributions are paid to unitholders that own the MLP as of the record date, which is usually a few weeks before pay date.  To be the unitholder of record, you need to buy the MLP before the ex-dividend date (ex-date for short), which is 2 trading days before the record date.  So, on the ex-date, if you buy the MLP from someone, you are buying it without the dividend that will be paid a few weeks later.  In theory, all else in the market being equal, the market will open trading on the ex-date at the closing price less the distribution.

Its hard to tell how efficient the market is as accounting for distribution ex-dates, because a lot of market noise can happen between close on the prior day to the opening print on the ex-date.  It is possible there are trade-able patterns in MLP price as a result of the thinly traded nature of some MLPs, but any analysis of those patterns for longer than the specific ex-date increases the possibility that your pattern is the result of some other factor.  For that reason, I’ve run some numbers that show how some MLPs trade  from the prior close to the open and then to the close on the most recent ex-date and for the last 12 ex-dates.

The table below shows that the 5 most actively-traded MLPs opened trading on their most recent ex-dates (all over the last few weeks) opened close to where they theoretically should have, and then traded continued lower throughout the day.  For the 5 most thinly traded MLPs (that have paid distributions for 3 straight years), they opened slightly better than they should have, and on average ended the day flat.

So, small caps have held up better on ex-dates and appear to be priced correctly… this quarter.  That makes sense, because we have been seeing seeing a rotation out of MLPs in general in favor of other stocks, which is hurting the large cap MLPs more than small caps that carry less weight in the index that the Alerian MLP ETF tracks.  Also, small cap MLPs vastly underperformed in 2011, so they are seeing more buyers this year in the search for value in an MLP sector that had gone straight up from October through year end.

For the 3 year look back below, I highlight the difference between the distribution and the opening and closing prices.  The table below shows the same data as above for this quarter, and you can see that the highly-traded MLPs have sold off more than the distribution this quarter.  In the right half of the table below, the chart shows little difference between actively and thinly traded MLPs.

In general, it seems like the only noticeable pattern here is that MLPs tend to trade lower from the opening print to closing print on ex-dates.  That makes some sense, in that investors may have wanted to sell, but were waiting to get one final distribution before selling, so they would add to the expected technical selling, driving the price down more than is reasonable.  So, if you are a day-trader, maybe you short the open.  If you are a long term investor, there appear to be opportunities to buy oversold MLPs on ex-dates.

Despite all this good news, interest rates remain very low, the 10 year treasuries remains under 2.0%, a paradox of sorts in the face of such large positive swings for stocks since September 30.  Oil and gas prices were both down as well, even as the U.S. Dollar lost ground to the Euro this week.  So, it seems like all cash flowed into stocks today and away from almost everything else.

As I discussed in my Winners and Losers post earlier this week, there is now and has been for at least the last 18 months, dichotomy between haves and have nots in the MLP sector continues to grow.  This week, that was epitomized by the strength in earnings from Enterprise Products ($EPD) and Markwest ($MWE) compared with weakness from earnings of Inergy ($NRGY), Niska Gas Storage ($NKA) and Suburban Propane ($SPH).  EPD is so well positioned in the active shale plays that it is able to pick and choose high return crude and NGL projects, as highlighted by its blowout quarterly earnings (press release).  Markwest announced expansions to its processing facilities in the Marcellus and Utica (press release).  Whereas NRGY, SPH and NKA are struggling just to keep their heads above water.

Also, there were 2 equity offerings this week, $150mm primary issuance from Breitburn (press release) and an untimely Chesapeake Midstream secondary sale of units owned by Global Infrastructure Partners (press release).  CHKM had traded poorly for the last week prior to the deal following the announcement from CHK that it would curtail drilling in areas where CHKM has assets: Barnett and Haynesville shales.

In SEC filing news, there was a new initial S-1 for an MLP filed this week: Foresight Energy Partners.  Foresight is a coal operator backed by Carlyle  (filing).  There have been no other S-1 filings or updates to S-1′s this year to date.  Also, KMP updated its shelf registration to add an additional $600 million, for a total of $1.2 billion (filing).

Expect MLPs to outperform this week, as some of the stock market euphoria fades and MLPs catch up with ex-dates now finished.  Also, expect to read a piece from me about how certain MLPs typically do after ex-dates.

In case you missed it earlier this weekend, more breakdown of MLP performance: Winners and Losers

About the Big Game

Quick note on the Super Bowl: I’m a Patriots fan, even though I wasn’t born in New England, and I only started to like the Pats right before they started winning Super Bowls.  I guess that makes me a front runner.  But don’t question my fandom so fast.  I grew up an Oilers fan, watching Warren Moon zip the ball all over the field to Ernest Givens, Haywood Jeffires, and Drew Hill…  and watching them fail repeatedly in the playoffs, never more dramatically than against the bills after leading 35-3 at halftime in 1993.

Anyway, when the Oilers left town in 1997 for Tennessee, I rooted for the Zombie Oilers in their Super Bowl run (that included revenge on the Bills with the Music City Miracle), ending 2 yards short of victory against the Rams in the 2000 Super Bowl.  That almost Super Bowl Victory offered some closure, and I became something of a free agent fan.  Having spent 4 years in Connecticut for high school and starting college in Boston, I decided to jump on the Patriots bandwagon in 2000.  Its been a great ride, watching them rise from massive underdogs led by an unknown 6th round draft pick quarterback to perennial favorites (and hated as a result nationwide) led by a pretty-boy future Hall of Famer with a supermodel wife.  So, win or lose tonight, its been lots of fun to live in Boston during this decade of dominance.  Go Pats.

(Brady before he was drafted)

Also, this super bowl has a direct MLP connection.  The Tisch family, owners of the Giants along with the Mara family, owns through Loews Corp, the general partner of Boardwalk Pipeline Partners ($BWP).

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 EPD.

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 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 5^th 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.

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:

• CMLP
• 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
• XTEX
• 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 10^th 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…

Distribution Announcements

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%

NRGY had a rough Friday, falling more than 23.5% on the distribution announcement press release it released, more on that in Week Thoughts later this weekend.  It is interesting to see that NRGY’s new public subsidiary, $NRGM, was in the top 5 this week after research initiation pieces came out with glowing reports.  NRGM is now up 6.5% this year, compared with NRGY down 29%, pretty amazing disparity.  NRGY’s drop overshadowed a rough week for Chesapeake Midstream ($CHKM), which dropped 5.9% this week on news of curtailed dry gas drilling plans out of parent company $CHK. more on that later as well.

MLPs are set to finish January positive as usual, but stocks are winning so far this year, as investors seem to be feeling less defensive and are favoring stocks over MLPs right now.  Interesting to see stocks and gold going in the same direction, but gold’s move probably has something to do with the Fed’s commitment to lower rates at the expense of the dollar, which was down this week and down on the year.  Royalty trusts are down for the year following oil and gas prices down.  General partners are outperforming again.

All top five MLPs are small caps that were beaten down last year.  As investors become less defensive, expect this trend to continue with small cap recovery stories beating large cap MLPs that are going to get sold as investors exit the ETF and ETNs in favor of other stocks.  Bottom five is dominated by propane MLPs, but also includes SXL and CMLP.  SXL appears to have lost steam after a 40%+ year last year saw some analysts cutting ratings and price target on valuation and slowing growth now that crude spreads have narrowed.  CMLP appears to be struggling because its assets are largely in dry gas areas, which may see production declines with natural gas prices so low.

So, those are the numbers this week, more thoughts coming later in the weekend.

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.