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October 10, 2014

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MLP Checkup

MLPs were in free fall this week, the likes of which we haven’t seen since August 2011.  The Alerian MLP Index officially reached correction levels intra-day on Friday, reaching its lowest point since late March of this year.  At its low point for the day, the index was down 5.6% intra-day, 13.0% in 15 trading days since September 19th, and 13.5% since its most recent all-time high reached on the last day of August.  There is more on how recent MLP weakness compares with other selloffs in MLP history below, and more on individual MLP performance in my regular weekly post.
MLP Correction 2014
In times like this, when paper value is evaporating and fear starts to set in, it is important to step back and review the investment case for MLPs.  Last week, we published a marketing commentary on the MLP space.  The focus was to look at some of the fundamentals of the sector and highlight the strengths of the MLP story.  The main conclusion is that MLPs are poised to deliver 6-8% distribution growth, in line with historical averages.
You can click here to read the report, and please take the energy futures chart with a grain of salt as the data is from 9/15.
What the market is willing to pay for that 6-8% growth is the question mark.  After this week, it is clear that the market either doesn’t believe in continued distribution growth along historical levels, or that it believes the growth and doesn’t want to pay quite as much for it.  If growth is in question, that may have some merit if you believe oil prices get so low that drilling slows down or if you believe weaker economic growth reduces global demand for energy.   But the impact of those macro factors is probably overdone, especially given the fee-based nature of cash flow, recent long-term commitments to pipeline projects and LNG projects, and given we sit on the precipice of another potentially cold winter.
Historical Context of the Correction
This week was the 10th worst week for the MLP Index of all time (see below for others, many of which were associated with the financial crisis).  It was also the worst week in about 4 and a half years.  MLPs have been down for 6 straight days, and week over week have been down for 3 consecutive weeks.
Worst weeks ever
This current 6-day streak is the 29th streak of 6 or more consecutive down days for the Alerian index since 2000, and it is the 3rd such streak so far this year, but saw overall declines during the streak of less than 5%, compared with the current streak at -7.2%.   The good news in all of this is that history says after a horrible week like this, the market tends to bounce back, and recoup at least some of the losses from the selloff.
The Alerian MLP Index is at its lowest point since May of this year.  We have seen a 9.7% correction since the end of August, and a 9.2% correction since 9/19 levels.  This is a full correction.  If you go back and track the peaks and troughs of the MLP sector, the average peak-to-trough decline is around 9.6%, based on the below chart I published last year.  The current decline is near the average, which doesn’t mean it’s over, but it may help comfort you after a rough week.
2013 Correction
More on the week in MLPs later this weekend.

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