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May 25, 2014

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MLP Week Thoughts: All-Time High-Lights

For the 4th straight week, the Alerian MLP Total Return Index was positive, but broke the streak of 3 straight weeks of outperforming the S&P 500, which was up 1.2%.  Interest rates and natural gas prices were basically flat, while oil and NGLs (particularly propane) were up sharply week over week.  The S&P 500 closed at a record high Friday, while the Alerian MLP Total Return Index hit a new all-time high on Thursday.
Weekly MLP Review_5-23-14
All-time highs can be scary, particularly if you have new money to put to work.  No one wants to be the last one in, and it can be hard to overcome the sense that you’ve missed the boat.  That’s why you hear the “what inning are we in?” question so frequently in this sector.  I’ve posted the following table a few times before to show that all-time highs by themselves haven’t signaled a top for the MLP Index, although when a year sees more than 50 new highs, typically the index struggles next year.  We didn’t reach 50+ last year, but we are on pace for 50+ this year.
All-time Highs
Since the beginning of 2009, the MLP Total Return Index has closed at all-time highs on 183 separate days, including 59 in 2010 alone.  During all of that time, however, the all-time low yield for the Index has not gone lower than its 2007 low of 5.4%.  MLP distribution growth is driving the index higher, not valuation alone, at least when looking at the sector as a whole.
NAPTP Conference
The annual NAPTP MLP conference was held this week in Jacksonville, FL.  The conference offer the most MLP management teams at a single conference of any other conference, and it’s not restricted to clients of any single Wall Street firm.  There is typically not much in the way of new news, and institutional investors like me have already met with or seen most of the management teams in the space within the last 6 months.  But, it’s the best conference in terms of hallway conversation and assessing institutional investor sentiment, given the amount of bankers and large investors that show up.
Attendance: According to some, the MLP conference saw record attendance again this year at more than 1,000 registered participants.  See below for one firm’s reported annual attendance figures, with an estimate for this year.  The numbers below may be actual attendance, as opposed to registered participants, because I remember 2013 media reports (like this one) that reported 1,100 registered participants last year.
My own sense from looking around was that the conference seemed light on participants other than buy-side investment teams, sell-side analyst teams, bankers, accountants, institutional salesmen, attorneys, and the occasional serious private MLP investor.  There weren’t as many retail brokers, small RIAs or individuals.  Further evidence of the institutionalization of the sector.
Also, the conference wasn’t the spectacle for financial media it was last year, when I met writers from Barron’s and Forbes (there to report on the conference).  Also, Hedgeye didn’t even show up.  Moving the conference away from the greater New York area to Jacksonville, FL makes it cost prohibitive for journalists from major finance publications to attend.  Less financial media exposure is probably a good thing on balance.  Media exposure can shed light on an undervalued sector, but increased attention can lead to unnaturally high valuations.
Venue: As far as the venue, I thought it was pretty great.  Presentation tracks were right next to each other, there was a Starbucks in the hotel, weather was great, ample onsite bar space for networking, dinners were either at golf courses or at the beach, and 1×1 meetings were mostly located in the same general area.  Small issues with the venue include lack of any tables to go with all the chairs in the presentation rooms, and the few 1×1 rooms that were not in the conference area at all.  Overall, the venue was better than any we have seen before.
Buzz: We came away from the conference with a positive sense of the growth opportunities available to certain MLPs, and a positive sense of the continued growth of institutional ownership of the MLP sector.  Other topics I heard discussed around the conference:

  • Departure of yet another prominent equity research analyst to the buy-side (I believe I had that trend)
  • Surprise over strength of demand for some recent MLP IPOs, given growth prospects and relative asset quality
  • Elevated M&A competitiveness, questions over multiples paid
  • Management bashing by other MLP management teams
    • Will become increasingly prevalent as MLPs compete more directly for capital
  • Up-C structure as it relates to ETE
    • What ETE might do with that new “currency”
  • Strength of BWP trading, speculation over potential acquirers
  • Basin of choice if you have a choice: Permian
  • LINE / XOM asset swap
  • Capital flows into the sector continue, including from Asia (Japan mostly)
  • Exports needed to balance condensate market
  • Rail’s role in moving Canadian oil south
  • Linn Energy asset swap with Exxon

Update of PWC’s MLP Ownership Numbers:  PWC processes the vast majority of K-1s for MLPs, and each year they present their breakdown of MLP unit ownership by entity structure.  Individual ownership of MLPs was down to 34% of total units on the market in 2013, down from 47% in 2005.  Foreign citizens, partnerships and corporations have picked up the slack, accounting for a combined 38%, up from around 15% in 2005.
MLP Ownership
Suggestion for Presenters: It would be helpful for MLPs to include a slide at the end of their NAPTP presentation with the following information, which tends to come up in Q&A:

  • Percentage of distribution tax deferred
  • Unit price
  • Yield
  • ATM status (if you have one or not and the size)
  • IDR status
  • Subordinated unit status
  • Debt status (do you have any and if so, how much)
  • How many units your MLP has

Winners & Losers
BWP’s stock prices continues to march higher, closing week up 12.8% on no news to lead the MLP sector, but the market clearly liked BWP’s NAPTP presentation, which provided a bit more detail and disclosure than usual. Large cap MLP ACMP made the top 5 this week, up 5.1%.  Rounding out the top five were 3 MLPs with non-traditional assets (HCLP, SUSP and OCIR).  WPT (closed at $19.24/unit this week) continued its downward slide, down 15.8% (including its distribution) since reaching its all-time high of $23.20/unit on April 23rd.  WNRL, a consistent feature on the top 5 year to date performers this year, dropped 3.9% this week and is down 4.9% since peaking May 15th.  MLPs with non-traditional assets (KNOP, EXLP, SGU) round out the bottom 5 for the week.
There were no repeats in the top or bottom five this week.
The bottom 4 names for the year didn’t change this week, but if BWP (-29.9%) continues trading up, it may displace EROC (-29.1%) and climb out of the MLP cellar.  The fifth worst performing MLP continues to vary week to week, with LGP taking the spot this week.  WNRL’s recent weakness allowed EQM to bounce back into the top 5 this week.  The top maintained their order, but continued higher for the most part this week, with TEP showing particular strength Friday when it was up 4.9%.
News of the (MLP) World

  • Regency Energy (RGP) files equity distribution agreement to sell up to $400mm worth of common units at-the-market (filing)


  • Energy Transfer Equity (ETE) prices $700mm add-on offering of 5.875% senior notes due 2024 at 102% of par (press release)

M&A / Growth Projects

  • Linn Energy (LINE) announces agreement to trade a portion of its Permian acreage with Exxon Mobil for operating interests in the Hugoton Basin (press release)
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