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September 3, 2016

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MLP Week Thoughts: Calm After the Storm

MLPs traded up 0.9% this week, somehow outperforming the S&P 500 and matching utilities despite across the board commodity price declines, including a big move lower in oil prices week over week.  The lukewarm payroll report Friday helped yield-based equities, including MLPs and utilities, finish the week strong.  Utilities had been the worst performing group of stocks in the S&P 500 in August.
In recent weeks, the media has highlighted that volatility and trading volumes have been abnormally low, even for late summer.  Apparently the month of August had the lowest trading volume in more than 2 years, and the month of August saw no 1% moves in either direction for the S&P 500 (WSJ article).
One thing that hasn’t been calm is oil prices, within the broad range of $38/bbl and $50/bbl since the Brexit vote.  However, unlike in 2015/early 2016, MLPs aren’t being whipped around by big oil price moves.  This week is a prime example: high volatility in oil prices, low volatility in MLP prices.
The market is ok with MLPs if oil prices are in this range, choosing to focus on large yields and stabilizing outlooks.  This isn’t complacency, its common sense.  Most MLP outlooks don’t change meaningfully with every $1.00/bbl change.  The oil price crash, customer counterparty risk, capital markets freeze distorted the stability of most MLP assets.  Distributions have been cut, capital has been raised, assets have been sold, IDRs have been waived, JVs have been signed… and now oil price moves don’t hurt as much.
This weekend in the Northeast, with a hurricane potentially bearing down, it’s the calm before the storm.  But in the MLP market, it’s the calm after the storm.
Status Update
MLPs finished August down 1.3%, the first negative month for MLPs in 5 months.  The MLP rally lost steam in July and August on falling oil prices, less interest from retail investors and some bearish NGL data points.  MLPs are now negative for 3Q to date, although remain up around 15% YTD through Friday and around +60% off the 2/11/16 bottom.
As shown below, September of last year was the worst month of all the months in the downturn at -15.3% (August 2016 doesn’t crack the top 12).  The median return in September over the last 20 years has been positive, and October as well.
Worst Months_August
We shall see if yield-hungry retail investors provide a Fall jolt to restart the MLP rally.  But even if uncertainty on oil prices and rate increases reigns for another few months leading to further MLP consolidation, the sector outlook is in much better shape now than it has been in nearly 2 years.  And we may be entering a period more like the middle columns above (the 5 years before the oil collapse that came after the global financial crisis), where the amplitude of the MLP Index movements tightens up for a period of time.
Winners & Losers
AMID led all MLPs this week with a 19% pop.  One of AMID’s financial sponsors had been slowly selling its stake down over the last few months, but this week it disclosed a clean-up block sale that covered the remaining 2.5mm shares ($30mm worth) it held until 8/30.  The removal of that overhang helped drive the stock higher.  Beyond that trade, it’s hard to see any themes among the winners and losers this week.
Year to Date Leaderboard
SXCP’s huge week pushed it back to the top of the MLP heap this week, and AMID’s surge helped it join the top 5.  On the downside, CPPL climbed out of the bottom 5, while VLP slipped back to replace it.
GP Holding Companies
GPs slightly outperformed MLPs this week overall.  WMB repeated in the top 5, while OKE and NSH rebounded from the bottom last week to near the top this week.
News of the (MLP) World
No surprise that it was incremental news on already announced transactions for the most part this week.  New news should come back to the fore next week, likely in the form of capital markets activity.

  • No transactions, but the WSJ put Noble Midstream (NBLX) on the list of IPO expected in the Fall, which should not come as a surprise to MLP investors (article on IPOs here)

M&A / Growth

  • Enbridge Energy (EEP) and Enbridge, Inc. (ENB) announced final details of joint funding plan for their $1.5bn acquisition of a 27.6% interest in the Bakken Pipeline System (press release)
    • EEP and ENB will split the funding 25%/75%
    • EEP will fund its portion ($375mm) through a combination of equity (PIK units to ENB) and borrowings
    • EEP will also have an option through 12/31/2019 to acquire an additional 15% interest of the 27.6% interest from ENB
    • EEP and ENB also announced deferral of Sandpiper Pipeline project, withdrawing its regulatory applications with the Minnesota PUC, effectively cancelling the project
  • Delek US Holdings (DK) announced the sale of its retail gasoline business, MAPCO Express, Inc to COPEC for $535mm (press release)
    • These assets were discussed as potential drop-down assets for subsidiary MLP Delek Logistics (DKL), but after reviewing that option, DK felt a third party sale created more value for DK


  • Anti-fracking related initiatives (No. 75 and No. 78) in Colorado failed to make the November ballot because supporters didn’t collect enough valid voter signatures (Colorado Secretary of State)
    • This was one of the first major statewide anti-fracking efforts targeting a region where high levels of fracking are already occurring
    • Hard to put the toothpaste back in the tube or to roll back the economic (and tax) benefits of development
  • Williams (WMB) announced appointment of three new independent directors (press release)
    • Appointments result in 10 director board, with 9 independent directors
    • New directors include: former American Midstream CEO Stephen Bergstrom, Pioneer Chairman and CEO Scott Sheffield, and PPL Corporation CEO William Spence
  • Enterprise Products (EPD) announced that its ethane export facility at Morgan’s Point has loaded its first cargo (press release)
    • INEOS Intrepid loaded 265,000 barrels of ethane and set sail for its facility in Norway
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