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December 28, 2012

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MLP Prop Bets: 2012 Review

Last year around this time, I published a list of gambling-style lines for different statistics within the MLP space, along with my predictions as to whether we would see over or under each number.  The plan is to do that again with a post over the weekend.  But first a brief review of how the 2012 lines finished.  See below for a recap of all the lines (which were totally made up by me), my picks and the actual result.

Vegas(Vegas Fall 2012, photo courtesy my phone)

1. Number of MLP IPOs

  • Line: 9.5
  • My pick: under
  • Actual result: 12, 13 counting GP IPO Western Gas Equity (WGP)

There were 12 MLP IPOs this year, including 3 from variable distribution MLPs.  MLP IPOs were the bright spot of the sector this year.  Just a simple average of the total returns of each MLP IPO from IPO date through today is 20.3%, compared with the Alerian MLP Total Return Index (AMZX) of 3.6% year to date, and an average total return for the index since each IPO date of approximately -2.7%.  On average, the average outperformance for MLP IPOs in 2012 vs. the Alerian MLP Index since each IPO has been 2,286 basis points.  The best performing MLP IPO has been NTI, with total return of 92.9% as I write this post, an astonishing 9,207 basis points difference when compared with the Alerian MLP Index return of 0.8% since NTI’s IPO.  Only 3 of the 12 IPOs have been beaten by the Index since their IPOs: PDH (-20.6% total return vs. AMZX 0.0%), HCLP (-10.8% vs. AMZX -1.6%), and LGP (-8.8% vs. AMZX -5.5%).

2012 IPOs

Last year was a record year for the number of  MLP IPOs at 13, but the after market performance of those MLP IPOs was much less exciting.  The average total return of the 2011 MLP IPOs from IPO date through year end 2011 was 11.8%, compared with 13.9% return for AMZX for 2011 overall and 7.2% return average since each IPO date.  Average outperformance of each MLP IPO in 2011 from IPO date through year end was 462 basis points.  There were several bright spots, like TLLP and UAN each up around 60% from IPO date to year end, but overall not as impressive as 2012.  2011 was the year of fund flows into passive MLP vehicles like AMLP, which disproportionately benefited the large cap existing MLPs.  In 2012, it seemed like institutional investors suffered some fatigue in those large cap MLPs and existing MLPs that had multiple large equity raises in the year.  Instead, investors turned their attention to new MLP stories.
2. Number of GP Holding Company IPOs

  • Line: 0.5
  • My pick: over
  • Actual result: 1

In last year’s post, I listed several potential GP IPOs, and I updated that list in this recent post.  While Western Gas was not on that list, and that GP IPO was not really a monetization like I argued we would see from certain private equity backed MLPs, the value creation of the IDRs is undeniable and will lead to more GP IPOs and GP sales in the future as GP owners look to monetize that value.  Also, given the success of the WGP IPO in a very choppy equity market in December proves once again that there is some scarcity value in GPs, given there are only 6 pure play GPs trading right now (not counting ETE and KMI which have other assets besides GP and LP interests in underlying MLPs.
3. Amount of Equity Issued by MLPs (including IPOs)

  • 2012 Line: $30.0 bn
  • My pick: under
  • Actual result: $21.5bn

I set this line way too high last year (think I had wrong data on 2011 equity issuance), despite a record equity year, my under call was still right.  This year, in the public equity markets, we saw $18.3 bn in follow on issuance and $3.3 bn in IPO issuance, including underwriters’ overallotment options.  I expect another record year next year in total issuance, but it remains to be seen if the recent trend of 1 day book build deals (as opposed to the overnights that dominated recent years) will continue.
4. Number of New MLP ETFs (not including ETNs)

  • 2012 Line: 3.5
  • My pick: over
  • Actual result: 3

I was close to right here, but missed the mark by one MLP ETF.  Seems like the market is happy with its MLP ETF options at this point, with no ETFs planned.  Open end mutual funds targeting MLPs grew their assets substantially this year.  We also saw the introduction of large scale institutional passive MLP separate accounts programs (notably State Street in September). We also saw the JP Morgan Alerian MLP Index ETN (AMJ) reach its capacity this year at more than $4.5bn in originations.  So, in 2012 we did see a continuation of large asset growth into the sector, but the number of ETF wrappers for those assets didn’t grow as much as I expected.

  • 2010:
    • Alerian MLP ETF (AMLP)
  • 2012:
    • Yorkville High Income MLP ETF (YMLP)
    • First Trust North American Energy Infrastructure Fund (EMLP)
    • Global X MLP ETF (MLPA)

MLP Funds

5. MLP Consolidations (an MLP buying another MLP or GP)

  • 2012 Line: 1.5
  • My pick: over
  • Actual result: 1.5

This stat counts announcements, not closings, so KMI buying the GP of EPB doesn’t count for 2012.   ETE’s purchase of SXL’s GP counts, though.  Chesapeake’s sale of half the GP of its midstream MLP to GIP, and GIP’s subsequent partial GP sale to the Williams Companies adds up to maybe half an MLP consolidation.  And NRGY’s sale of its propane business to SPH probably counts as half a consolidation.  So, we’ll call this one a push, because there were  no L.P. takeout deals like I discussed in last year’s post (KMP buying EPB, ETP buying RGP).
6. Distribution Cuts

  • Line: 0.5
  • My pick: over
  • Actual result: 3 (NRGY, RNO and OXF)

In 2009 there were 7 distribution cuts, and 8 in 2009 (many of those were repeat distribution cutters – stepping down in 4Q08 and 1Q09).  But aside from the financial crisis, 2012’s 3 cuts were the most ever.  Given how many MLPs there are now after 25 MLP IPOs in 2 years, we are going to see at least 1 or 2 distribution cuts each year going forward.  This new normal situation is a result of the growing number of MLPs, but also the composition of the assets they own.
There are MLPs that have assets all along the energy value chain, in all sorts of commodities and geographies. Each commodity, each step in the value chain, and each geography can potentially create individual MLP distress that leads to a distribution cut, even while most of the other MLPs that don’t share that concentrated risk are not in distress.  In 2012, with the warm winter and natural gas production growth, propane and coal MLP operations struggled to keep pace with distributions in some cases.
7. Returns vs. S&P 500

  • Line: 0.0%
  • My Pick: over
  • Actual result: around -1050 basis points as of this writing

This was the biggest whiff on the board, and really the only one that mattered for MLP investors, unless you were exclusively investing in MLP IPOs (see above).  It was the first time in 12 years that MLPs produced returns substantially lower than the S&P 500.  It had to happen at some point.  Low commodity prices weighed on the sector this year, combined with record equity issuance and scared retail investors.  Next year there will be more equity issued, hopefully stronger commodity prices, not sure about retail investor sentiment.  I expect to see more growth in MLP investment this year from institutions we haven’t seen in the MLP space.  The RFP’s from various pension funds around the country regarding MLPs will move the needle in 2013.

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