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June 14, 2015
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Oil, natural gas and NGL prices were up, the S&P 500 and interest rates were stable this week, and yet MLPs were down for a 4th straight week. The selloff was broad-based across sub-sectors, with pockets of small-cap strength. Even a large private equity M&A transaction for midstream assets couldn’t garner enthusiasm for the sector overall. It makes it hard to visualize where the MLP sector catalyst is going to come from.
When oil prices collapsed more than 6 months ago and rig counts starting falling, it was supposed to be a matter of time before oil production peaked. In the meantime, demand would react and eventually catch up with supply, tightening the market into the back half of the year.
Here we are months later, and U.S. production growth is still cresting. Demand is doing its part, and inventory draws have been happening here and there, but growth continues, with production running at around 9.6mmbbls/d in May. We started this journey towards slowing U.S. production months ago, and it has been a painful journey for MLPs. We should soon see production rollover, and in a few weeks we will be in the second half of the year. Maybe the calendar is the catalyst…
Poll Question
Recap: Last week’s poll question was about oil exports, and the consensus of those that voted was that oil producers (37%) would be the biggest beneficiary of the oil export ban being lifted, followed by pipeline and storage MLPs (35%). In last place were the gathering & processing MLPs (4%), behind the U.S. consumers (6%) and shipping MLPs (18%).
This week, the Hess transaction was intriguing because of its high multiple, and I wanted to get your take, readers, on what the valuation implications of the high multiple might be for MLPs.
Sorry, there are no polls available at the moment.
Winners & Losers
The winners had a small cap bias this week. DKL bounced back from last place last week to first place. SMLP reversed poor recent trading with a 7.4% bounce on Friday, which I can only assume is a positive read through from the Hess Bakken Midstream transaction announced Thursday morning, because Hess is a customer of SMLP’s in the Bakken. HEP will be added to the Alerian MLP Index and traded well in light of that.
On the downside, GLP’s equity offering sent its stock sharply lower, while DPM cracked the bottom 5 this week with no news (and for DPM, no news is bad news, as the market awaits a sponsor solution).
Year to date
Year to date, no change among the bottom 5, still dominated by upstream MLPs. On the upside, its small cap MLPs with limited commodity price exposure leading the way, with DKL replacing GLP in the 5 spot.
GP Holding Companies
GPs had another rough week, but overall outperformed the AMZ. No meaningful announcements among the GPs this week, but PAGP did disclose the PAA pipeline oil spill cleanup expenses so far, which didn’t help. OKE continued its relentless decline, down another 2.7% this week and is now down 45% since peaking in September 2014. When growth rates get reduced at the MLP level, the pain gets amplified at the GP level.
SE made it a second straight week down more than 3%, likely on DPM’s weakness.
News of the (MLP) World
Light week of MLP transactions, but news flow around the MLP space was pretty extensive. Alerian announced big turnover in this quarter’s index rebalancings. Hess Midstream found a big private equity partner for its eventual MLP, Cheniere announced another 19 mtpa of LNG export projects, and a yieldco IPO launched. In the MLP space, there was a small follow-on offering that traded down in the after-market, suggesting pricing on follow-on offerings still hasn’t quite been calibrated for the new normal MLP fund flow situation.
Equity
M&A / Growth Projects
Other