MLP HINDSight

MLPs under-performed this week with a 2.2% decline, giving back all of the last 2 weeks worth of gains.  In 2013 so far, only 4 out of 14 weeks have been down, and this was the worst of the 4 down weeks of the year.  Weak unemployment claims, then weak employment data sunk the broader market.  Oil, propane and ethane prices plunged as well, contributing to the out-sized decline for MLPs vs. the market.  Natural gas was the bright spot, with futures up 3.0% this week and above $4.00 for the second straight week.

The 10-year treasury interest rate closed the week at lows for the year, slightly below 1.7%, which puts the MLP Index yield spread to the 10-year at more than 400 basis points.   An EPA announcement regarding sulfur standards for refineries this week sent refineries into a tailspin, dragging related entities (in some cases their pipeline subsidiaries) down with them.  The MLP sell-off was overdue, and a little more short term MLP weakness would probably be healthy for the MLP space at this point.

For the year, MLPs are still way out in front, slightly behind GPs, which have produced 18.4% total returns on average.  Variable distribution MLPs were hit hard this week as both fertilizer production and crude oil refining MLPs (previously white hot sectors) were down big, including ALDW down 16.6%, NTI down 10.9%, and RNF down 10.7%.

Winners & Losers

NKA was the big outlier for the week, up 20.4% after management announced an equity restructuring to replace subordinated units and original IDRs with a new set of IDRs that are entitled to receive 48% of any quarterly distributions by NKA after common unitholders have received the full minimum quarterly distribution (still $0.35/unit).  XTEX was another big winner, probably not the result of Guzman & Company initiating XTEX at Neutral on Monday.

MPLX and DKL found themselves in the bottom 5 this week, likely a knock-on effect of weakness in parent refinery players after the sulfur requirement announcement.  If implemented, the new sulfur standards would cost some refineries a substantial investment to comply, and they might try to pass that along to consumers at the pump, which might reduce demand and therefore volumes in pipelines owned by the refined products MLPs.  So there is some fundamental impact on MLPs, but probably not enough to warrant such losses.

The top 5 for the year was shaken up this week, as BKEP, NKA and XTEX popped into the top 5, displacing BPL, OILT, and DKL.  SMLP and GLP remained in the top 5, but GLP had a down week.  There are still only 4 MLPs with negative total returns in the sector this year (not counting variable MLPs), and there were no changes tot he bottom 5 constituents and their order.

Don’t know what to expect this week.  It could be a quick rebound, which would signify large capital had been waiting for even the slightest downdraft to plow more funds into MLPs.  It could be a flat week, or one that sees MLPs trade with the market in whichever direction it goes.  Or we could see more pain, leading to a desperate search for the reasons for the selloff, and to many emails to me regarding my thoughts on MLPs being taxed, or distributions being cut…

Longer term, I am very pleased with the prospects of the MLPs I own for myself and for clients, and expect them to produce returns that exceed the market.  There is not much else to say beyond that (especially after another crazy Saturday filled with soccer practice and birthday parties for kids I’ve never met), so good luck this week and please sign up to receive research at www.guzman.com, becauseI am expecting to initiate on another MLP this week.

News of the (MLP) World

Equity

• Energy Transfer (ETP) prices public offering of 12.0mm common units at $48.05/unit, raising $576.6mm in gross proceeds (press release)
  • ETP to raise $576.6mm in gross proceeds from the offering, net of which will be used to reduce borrowings
  • Overnight offering, priced at 4.6% discount to prior close
  • ETP units traded up 1.1% from offer price in the session after pricing

• Spectra Energy Partners (SEP) prices public offering of 4.5mm common units at $37.25/unit, raising $167.6mm in gross proceeds (press release)
  • SEP prices offering at $37.25/unit, raising $167.6mm in gross proceeds, net of which will be used for capital expenditures and acquisitions
  • Overnight offering, priced at 4.0% discount to prior close
  • SEP units traded down 0.5% from offer price in the session after pricing

• Williams Partners (WPZ) files S-3 to sell up to $600mm worth of  common units (filing)

• KNOT Offshore Partners (KNOP) launches IPO of 7.45mm common units, which would raise $149.0mm at the midpoint price of $20.00/unit (7.50% yield).  Expected to price April 9 after the market close (latest F-1)

Debt

• Rentech Nitrogen (RNF) launches private offering of $320mm of second lien senior secured notes due 2021 (press release)

M&A / Growth Projects

• Ferrellgas (FGP) announces acquisition of Western Petroleum, a Utah-based propane company with residential and industrial customers

• New Source Energy (NSLP) announces acquisition of 3.9 MMBoe of oil and natural gas reserves, funded with 1.4mm common units of equity issued to New Source Energy Corp.

Corporate Actions

• Niska Gas Storage (NKA) announces equity restructuring and elimination of subordinated units, replaced by a new IDR structure (press release)

• New Source Energy (NSLP) announces plans to increase quarterly distribution 4.8% to $0.55/unit in 2Q 2013 and another 4.5% to $0.575/unit for 3Q 2013

Thought I’d take a break from watching what may end up being the worst day for MLPs so far this year (and will certainly end up being the worst day for refining stocks so far this year), and look back on what was a blissful quarter for MLP investors, the likes of which we’ve never seen.  What follows are a sampling of charts that breakdown that quarter’s performance, sliced in different ways.

First off, we’ll look at the broadest of my charts, a breakdown of the average total return of the MLPs in the Alerian MLP Index (which was up 19.8% for the quarter) vs. those that were not in the MLP Index (not including GPs and variable distribution MLPs, so it’s an apples to smaller apples comparison).  MLPs in the index did better than those not in the index, which is the reverse of what happened in 2012, when IPOs (by definition not in the index) did very well and boosted returns of the non-index MLPs.  2011, we saw MLP Index MLPs outperform.  Typically, you would expect MLPs in the Index to do better, because they are larger, more recognized names, with typically more proven asset bases, but also because of the fund flows into ETFs and other MLP investment vehicles that track the MLP Index or have to own the bigger MLPs that comprise the index.

What’s Working?

Second chart we’ll look at is the breakdown of performance by subsector.  If you click on this chart you can see a bigger version of it.  You can quibble with my classification of MLPs into various categories, but the major trends won’t change if you change a few MLPs to different categories.  The biggest positive trend is that liquids-focused MLPs are doing the best, particularly those transporting crude oil and refined products.  Coal MLPs are doing the worst (as usual the last few years).  Variable distribution MLPs have fallen off of late when compared with last year (and that trend is accelerating today with the refining beatdown and weakness in fertilizer fundamentals.  Upstream MLPs are also underperforming despite recent natural gas and oil price strength.  Upstream MLPs represent the best value in the sector right now, but they have less visible growth tied to M&A deals and they face large equity funding needs to execute those deals as they arise, which I guess scares investors away.  Also, the MLP ETF is under-performing, which will always be the case when MLPs are going up.

One final chart on MLP performance is a breakdown by historical distribution growth.  MLPs that grow continue to command a premium in the market, with those MLPs that grow distributions by more than 10% annually perform the best.  Distribution growth still trumps everything.  There are several MLPs with lower growth that have seen rebounds this year (like NKA and GLP), but on average they are still underperforming.

MLP Equity Issuance Update

The first quarter saw the most equity issuance ever for MLPs in public equity offerings (including IPOs).  It was also the first time 2008 that we saw a first quarter MLP IPO, and we actually had 4 of them.  In total, there were 23 MLP equity offerings in 1Q 2013, 19 follow-ons and 4 IPOs.  1Q tied the record for most equity deals in a quarter (tied with 4Q 2012), but it wasn’t the most active follow-on quarter we’ve seen, because in 1Q 2010 there were 21 follow-on deals.  I put this chart in here in response to a reader question regarding seasonality in equity issuance.  MLP IPOs do tend to happen more frequently in 3Q/4Q vs. 1Q.  For follow-ons, 1Q and 4Q tend to have more issuance than other quarters, but it really depends on market conditions.  3Q 2011 was a very challenging time to try to market an equity offering, as was 2Q 2012.  Less seasonality than just MLP price weakness that causes MLPs to issue less equity.  When times are good, expect to see MLPs take advantage of that and issue as much equity as they can / need.

MLPs and refiners are bouncing back for now, hopefully you got some bargains while they lasted.  I wouldn’t be too regretful if you didn’t, there will be other opportunities this year.

MLPs were up big again this week (Alerian MLP Index up 1.8%), this time the S&P 500 was up as well, joining the MLP Index in “all-time high” country. Oil, natural gas, propane and ethane were all up sharply this week, the quad-fecta.  Interest rates dropped slightly. MLPs were up 3 out of 4 days, with the bulk of the move this week happening on Thursday, which also happened to be the last day of the quarter.  And what a quarter it was…

It was the best quarter ever recorded for the Alerian MLP Index (+19.7% total return), narrowly beating 2Q 2009′s previous record of 19.3%.  Back in 2Q 2009, 86% of the return came from price appreciation as opposed to distributions vs. 91% this quarter, which makes sense given that distribution yields were much higher in 2009.  In 2009, MLPs had virtually no distribution growth, and most of the returns came from price appreciation, as yield on the MLP Index dropped from 10.9% to 9.2% quarter over quarter.  This quarter, the yield on the MLP Index went from 6.57% to 5.67%, and the implied MLP Index distribution grew 1.6% quarter over quarter.  MLPs were up 11.9% in January, flat in February and up 5.27% in March with approximately 150 basis points of 1Q returns resulting from distributions.   March’s 5.3% return was good for 2nd best March on record, surpassed only by March 2002 (+7.3%).  More on the quarter in a wrap up post that should come out at some point past midnight Sunday night / Monday morning…

When I have talked about MLP the MLP Index making all-time highs on a price and total return basis, I’ve been quick to point out that we are not seeing all time low yield for the index yet.  The all-time low yield is 5.37%, set back in July 2007.  We are now less than 30 basis points away from that, and with another month of MLPs potentially being bid up before distribution ex-dates happen, we could soon see a fresh all time low yield.  Should that happen, I likely would start to raise cash in my client accounts in earnest, which I have yet to do, even though the tone of my posts of late has been cautious.

Speaking of my bearish tone of late: the last 4-6 weeks, I have been airing my concerns over fresh all time highs.  Having spent the majority of my professional investing career during the last 4 years, its easy to figure out why I would be bearish after a 25% total return for the MLP Index in 4.5 months since 11/15/12.  The last 4 years, the trend has been up for MLPs and stocks, but each sharp rally was followed by renewed fears and a correction.  Sort of a whack-a-mole market, and if I’m the mole, I guess I’ve been flinching for a month or so waiting for the whack that hasn’t come yet.  

And yet, my cautious tone hasn’t manifested itself in the accounts I manage that were fully invested heading into this rally.  I haven’t lightened up my long exposure in any of our portfolios (although I did sell some calls last week).  I haven’t raised cash in separate accounts and haven’t shifted closer to neutral in our fund.  But this week, I probably will.  And if the reverse jinx continues for another week or even 6 more weeks until distributions get paid, that’s fine.  At this point, I’m going to maintain my bearish short-term stance even thought all signs point to a continued rise.  Its almost superstitious at this point.  The reverse jinx seems to be working, so why change my tone now?

Winners & Losers

SXE was the story of the week, after it posted very weak earnings on Thursday.  SXE was down more 20.5% for the week.  CLMT had an equity offering, which is behind its 4.5% decline this week.  STON and FGP, which typically exhibit low correlation to the rest of the MLPs, were also down.  LINE finally got into the top five to finish a tumultuous quarter on a positive note, buoyed by higher oil and natural gas prices.  Notable this week was that the biggest positive move was just 6% (all of the top 5 last week were up more than 6% last week), indicating broad participation in the rally, with not high side outliers.

For the year, DKL was the only new addition to the top 5, displacing GEL from last week.  Each of the top 5 MLPs this year are up more than 35%.  In total 16 MLPs have produced total returns of 30% or more YTD, which is amazing to me.  For the year, the aforementioned SXE joined the bottom 5, bumping LRE off the loser list.

MLPs are dominating this year to date vs other investments, on pace to start a new S&P 500-beating streak in 2013. GPs have outperformed, while last year’s big winners, the group of variable distribution MLPs, has lagged as a result of weakness in fertilizer companies in general lately. Oil and natural gas have been cooperating quite well for us MLP investors.  Natural gas above $4.o0 is a welcome sight for many MLPs.

News of the (MLP) World

All of a sudden the pending IPO list has heated up.  We went from pending MLP IPOs (all with stale registration statements) to 3 fresh MLP IPO candidates, after 3 MLP IPO’s filed their respective S-1s this week.  Below is an update of the IPO pipeline.  At some point it probably makes sense to remove those that haven’t filed an updated S-1 in more than 8 months, maybe once they’ve been stale for a year.  So far in 2013, we’ve seen 4 MLP IPOs, including; USA Compression, CVR Refining, SunCoke Energy, and New Source Energy.

There were also 2 MLP equity offerings this week.  ACMP performed well in the aftermarket, as have several of the recent equity offerings, which bodes well for future equity offerings (and for brokers selling those deals).  If follow-ons get in the habit of trading up after pricing, then the deals get easier to place, which opens up the equity markets to bigger and more frequent equity offerings.  Below is a summary of the last 10 overnight equity offerings, and their short term aftermarket performance.

Equity Transactions this Week

• Tallgrass Energy Partners, LP (TEP) files S-1 to raise up to $315mm in MLP IPO (initial registration statement filed confidentially under JOBS Act)
  • MLP that owns a midstream portfolio acquired for $3.3bn from KMP in November 2012
  • Assets initially contributed include the TIGT System, a FERC-regulated natural gas transportation and storage system with approximately 4,645 miles of transportation pipeline and natural gas storage facilities in the Rockies area
  • Tallgrass CEO Dave Dehaemers has extensive MLP experience at (NRGY and KMP) and Bill Moler (COO) also worked at NRGY
  • Standard IDR structure

• Phillips 66 Partners LP (PSXP) files initial S-1 to raise up to $345mm in MLP IPO
  • Another big brand name refined products drop down MLP, in the tradition of MPLX and TLLP
  • Standard IDR structure

• Access Midstream (ACMP) prices public offering of 9.0mm common units at $39.86/unit, raising $358.7mm in gross proceeds
  • ACMP to receive gross proceeds of $358.7mm, net of which will be used for general partnership purposes
  • Overnight offering, priced at 3.3% discount to prior close
  • ACMP units traded flat from offer price in the session after pricing

• Calumet Specialty Products (CLMT) prices public offering of 5.25mm common units at $37.50/unit, raising $196.9mm in gross proceeds
  • CLMT to receive $196.9mm in gross proceeds, net of which will be used to reduce borrowings
  • Overnight offering, priced at 4.0% discount to prior close
  • CLMT units traded down 0.5% from offer price in the session following pricing

• Emerge Energy Services LP (EMES) files S-1 to raise up to $100mm in MLP IPO (initial registration statement filed confidentially under JOBS Act)
  • Oilfield services MLP with frac sand operations and fuel processing / distribution segment
  • Backed by Insight Equity, a smaller PE investment firm
  • CFO is long-time MLP investment banker Robert Lane and Kayne Anderson’s Kevin McCarthy will serve as an independent director
  • No IDRs

Debt

• No transactions this week.

M&A / Growth Projects

• No significant transactions this week.