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January 2, 2012

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MLP Week Thoughts: Another Happy New Year

MLPs finished the week very close to highs of the year, after a 1.4% week that once again beat stocks and gold.  Treasuries were favored this week as well, as it appears investors are targeting income all across the risk spectrum from limited risk (treasuries) to stocks and MLPs.

Despite the strong finish, it was a rocky year for MLPs, which hit their peak on April 28th.  The S&P 500 hit its peak on April 29th (1363.61), the difference is, MLPs have retraced almost 100% of the subsequent drop, while the S&P 500 closed flat for the year.  The S&P 500 finished up 11.1% for the 4th quarter, MLPs finished the year with a 14.5% 4th quarter (not including distributions). MLP Index had total return of 16.3% in the 4th quarter, the 4th best quarter ever for the Index and largest since the 4th quarter of 2009.  MLP Index finished December up 5.7%, the second best quarter of the year (after 9.6% in October).  For the year, MLP Index had a total return of 13.9%, its 10th positive year in the last 12.
The darkest day of the year for S&P 500 was on October 3rd, when it closed below 1100, before rallying 100+ point the next 7 trading days.  The low of the year for MLPs was August 8th, when the index closed at 315.91, 13% lower than it began the year and 19% from its peak.  Since that day, MLP index has gained 23.4%.
What worked in 2011?

  • Recovery stories: EROC, APL
  • Drop down stories: WPZ, GMLP, WES, TLLP
  • Large caps: SXL, OKS, WPZ
  • General partner holding companies


What didn’t work in 2011?

  • Natural gas storage: NKA, PNG, NRGY
  • Propane: NRGY, FGP
  • Contract compression: GSJK, EXLP
  • Thinly traded small caps: NKA, OXF, CPLP, GSJK, STON

Last year (2010), only one of the 59 MLPs I was tracking had a negative year.  This year, 28 of the 70 MLPs that I track (40%) had negative total returns this year.   Only 1 of the top 10 largest MLPs was negative for the year (ETP), but five of the next 10 largest MLPs (10-20) had a negative year.

What will work in 2012?

  • Gathering and processing in liquids rich plays
  • General partners
  • Small caps (relative to large caps) as new money continues to chase MLPs
  • E&P MLPs
Looking forward to the January effect lifting MLPs again this year, but it’s been hit or miss the last 4 years, 2 positive and 2 negative…Happy New Year everyone, let’s make it another great one.

Winners and Losers This Week
CHKM led MLPs higher this week, helped by the announcement of a $865 million acquisition from its parent company, CHK (press release).  The deal was funded with $600 million in debt and $265 million in equity issued directly to CHK.   Biggest loser of the week was STON, basically taken down by a short seller’s public hit piece, detailed and discussed here.

News of the MLP World
Only other piece of news beyond the CHKM deal was EPD’s sale of $825 million of its ETE units.  EPD took advantage of prices for ETE not seen since early August, and received approximately $36.25 per unit, or about a 9% discount to the price per unit the day before the announcement.   ETE reacted positively initially, closing Tuesday up 3.5%, but drifted lower the rest of the week, closing up 2.0% for the week.
All else being equal, ETE is a more attractive company without the overhang from the EPD-owned units (overhang meaning the market knows EPD is out there holding more than $1.1 billion of their units, and will eventually sell).  After the transaction, EPD still holds 7.6 million units worth more than $300 million, so there is still some equity overhang out there.  It’s a great deal for EPD, which collects $825 million in proceeds, funding a substantial portion of its capital budget without causing volatility for EPD unit holders.
EPD has done an excellent job in recent years of tapping alternative sources of cash to equity offerings.  In addition to periodically selling ETE units it owns, EPD has steadily grown its coverage ratio (i.e. they have decreased percentage payout and retain more operating cash flow) to reduce its equity capital needs, and has tried hybrid junior subordinated notes in 2007.  “Necessity is the mother of creation” as they say, and as the largest MLP out there, EPD needed a way to avoid having issued $2.0+ billion of equity each year to keep growing, in a still developing MLP equity capital market that only issues around $20 billion of equity each year as a sector.
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. 

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