There may have been more people in the office this week, but they weren’t buying MLPs, which declined 4.3%, a multiple of the decline in oil prices this week. MLPs continue to capture a disproportionate share of the oil-related downside and limited upside. On August 24th, oil hit its most recent bottom just above $38/bbl. Oil has rebounded more than 17% since. As of Friday, the Alerian MLP Index has rallied just 1.7% since oil bottomed on August 24. MLPs have produced -23.4% total return YTD, compared with a 16% oil price decline. Oil price volatility means uncertainty, and uncertainty makes it hard for investors to buy in to the oil price rally.
On the bright side, natural gas prices are firming ahead of winter, as are lighter NGLs (granted, all off of very low bases). Also, the broader stock market stabilized, up 2.1% this week. Improvement in those areas could at some point draw attention away from oil price uncertainty, but it’s doubtful in the near-term.
A major energy conference this week did little to disconnect MLPs and the rest of the energy sector in the eyes of the market. Kinder Morgan’s presentation at the conference went to great lengths to explain how its business is about leasing space on its (mostly natural gas) pipelines, and not about oil prices. Higher oil prices are clearly positive for MLPs, but lower oil prices aren’t this negative for MLPs, especially when you hear about efficiency gains and continuously declining breakeven prices for new drilling.
Perhaps in an effort to take some of the spotlight from that conference, another broker published a lower for even longer oil price call, while simultaneously downgrading the MLP sector, which reinforces the perception that oil price and MLP price should have a linear relationship.
Winners & Losers
Very few MLPs were positive this week. DPM traded very well following the sponsor support transactions announced on Wednesday. Beyond that, news flow wasn’t a factor among the top 5. Equity issuance drove the downside for USAC and AMID. MEMP was the big loser, down sharply Friday which may have been a reaction to the news it would be removed from the Alerian MLP Index.
No follow through on positive price action for last week’s winners.
On the YTD chart, every one of the top 5 was negative this week, probably due to some profit taking among the group. USAC went from best performing MLP to 3rd best after its equity offering related beating this week.
General Partner Holdings Companies
GPs outperformed slightly overall, but they were all negative this week. GPs backed by producer sponsors led the losers. EQGP fell 15.6%, but still carries a very low 1.3% current yield, so not exactly cheap. OKE was the best performer in the group, as the market seems to buy into the volume growth story to some extent now that valuation has come down.
News of the (MLP) World
Two smaller MLPs decided to test the MLP capital markets this week, and were able to get their small deals done, but the aftermath for each was ugly. That should send a message to the rest of the MLP sector that if you absolutely need capital to fund growth, it may be cheaper to find a new sugar daddy to acquire you rather than launch an equity offering.
The major challenge is that large, well-capitalized MLPs trading at premium valuations are hard to find given the large-cap selling that’s happened as fund flows have exited. Even the big MLPs will either have to use their own equity or raise capital to fund the acquisition of another MLP. Maybe Apple will use some of its cash to start consolidating (nay, revolutionizing) the MLP sector…
M&A / Growth Projects