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November 9, 2011

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Equity Floods a Stormy Market and Other Bad Weather Metaphors

So much action this week, I decided to post some mid-week thoughts.
With 3 follow on offerings and 1 expected IPO, MLPs have issued more equity this week than any other week in the history of the sector (excluding the week that KMI went public earlier this year with a $2.8 billion IPO). If LRR Energy (on the road this week) prices at the mid point of its IPO range, and there are no other equity deals, there will have been $1.3 billion of new equity issued, not including the potential for 15% more with the overallotment options.

That flood of equity, combined with the end of ex-date season for MLPs, including a big ex-date on Monday for the Alerian ETF (which now has more than $1.6 billion under management, as discussed here), weighed on the sector on Monday and Tuesday.  Through Tuesday, MLPs were down 0.9% compared with the S&P 500 which was up 1.8%.  Then on Wednesday, the European debt storm clouds that have been circulating, finally opened up and crashed down on global markets, including MLPs.  Wednesday, the S&P 500 fell 3.7% on the day, while the MLP Index was down only 2.3%.  For the week, MLPs are down 3.2% compared with only 1.9% for the S&P 500.
I guess for the foreseeable future, we should expect the market to continue its binary action based on whatever crisis spits out the headlines that move money around.  For now, that’s the European debt crisis, but a few weeks from now, it could be the Super Committee Crisis.   All I can do is to use the rips to raise cash to buy dips of MLPs that will continue to efficiently put capital to work in projects that will produce distribution growth that outpaces the sector.  The earnings releases so far this week have been mixed but the MLPs that beat earnings (like MWE, OILT and TLLP) provided further data points on the strength of certain segments of the MLP space.
For $ETP, the equity offering was expected, as ETP will need all the cash it can get to help ETE acquire Southern Union and to fund expansion projects related to its Lone Star JV with $RGP.  We’ll see if once liquidity comes back to the stock market if eliminating that equity overhang helps ETP outperform going forward.
Other non-equity related news in MLP land include 2 projects to be built in the Houston Ship Channel, one involving a new oil terminal to be built by a JV of KMP and TLP for $400 million, and the other a crude pipeline and storage expansion by OILT.
As the floods rise and the storms rage, hope you built an MLP ark out of yield and growth, and are ready to ride out the storm tied to the mast of a strong NGL market…or maybe you donned your yield rainboots and distribution coverage umbrella… or the best plan may be to just stay inside (cash) until it gets clearer out there… ok, enough with the metaphors, have a happy Veterans Day.
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 ETP.

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