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April 3, 2013

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MLP Quarterly Wrapping

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.
MLP Returns_MLP 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.

MLP Returns By SubSector

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.
Return Breakdown by Distribution Growth
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.
MLP Equity Breakdown by Quarter
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.

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