Conditions were not met for the Fed to increase rates this week, and conditions for an MLP liftoff didn’t quite fall into place either. The Fed’s rate liftoff is delayed at least until the end of 2016. MLP liftoff timing is even more uncertain, as are the conditions. But rising rates are no longer standing in the way, and the removal of that headwind was a meaningful driver of MLP outperformance…for 2 hours on Thursday. While interest rates have taken a back seat lately to commodity prices and fund flows, the rally late Thursday implies that at least some of the recent MLP weakness was due to rising rate fears.
MLPs declined 0.4% this week, way underperforming utilities and tracking closer to the S&P 500. Oil prices rallied hard Wednesday on the bullish inventory report, but fell back Thursday and Friday. The Fed’s statements like “recent global economic and financial developments may restrain economic activity somewhat” contributed to the rally being faded. The schizophrenia this week in the energy sector was matched only by Donald Trump’s face at this week’s debate.
MLPs appear oversold at this point, after 3 weeks of negative price performance and -33.4% year-over-year total returns. 2008’s total return was -36.9%. The Alerian MLP Index finished that year with a yield of 12.1%, the highest month-end yield before or since that point. Given how much turnover the index has seen and how many young, high-growth, low-yielding MLPs there are in the index now, cross era comparisons are tough.
The index today yields 7.6%, the highest yield in more than 5 years. 19 out of 50 MLPs in the index currently yield more than 10%, and around half of all MLPs yield more than 10%. Yields of 10%+ for so many midstream MLPs has never been sustained for more than a few months in the history of the MLP index. Equity financing competitive midstream capex or acquisitions with 10%+ yielding equity is not going to work for long. At some point the “ask” side of the apparently still wide “bid-ask” M&A spreads will need to adjust lower or to hold on long enough for that elusive MLP liftoff.
CBRE Clarion Webcast Series
As a follow-up to the whitepaper we published on oil exports and the impact on midstream MLPs, we produced a webcast that went live on the website this week that runs through the main takeaways of the paper. You can click through and see the video here.
We expect to continue to produce whitepapers and webcasts on timely MLP topics. Send me an email if you have suggestions for a topic that deserves some detailed attention.
Winners & Losers
Three of the top five performers this week were E&P MLPs. VNR was the top performer after news last week it was being added to the Alerian MLP index while MCEP was the latest beneficiary of insider buying. NGL had strong performance as the positive vibes continued from last week’s unit repurchase program announcement. There were no clear trends among the bottom five although three of the five (PSXP, VLP, and CPPL) are dropdown growth stories, which are clearly no longer en vogue.
DKL fell out of the top five this week, replaced by CCLP while the bottom five names remain the same.
General Partner Holding Companies
WMB was the top performing GP after news the acquisition by ETE could be announced in the next 10 days. CPGX followed CPPL down this week. Other recently public, natural gas-focused, high valuation GPs TEGP and EQGP did not bounce back from their downdrafts last week.
News of the (MLP) World
Shaken by the action in small cap MLPs that issued equity last week, MLPs are likely pursuing alternative financing options rather than marketed follow-on offerings. PIPE chatter has picked up, and then a large PIPE was announced Friday, which was well received. This follows the OKS PIPE that seems to have helped OKS performance the last month, and the SHLX PIPE earlier this year. The PIPE market hopefully doesn’t get back to excessive levels we saw in 2006 and 2007, but in moderation PIPEs can help reduce the capital markets friction (to put it mildly) we have seen of late. Also expect some convertible and PIK units to be issued in the next few year to sponsors and dedicated MLP investors.
M&A / Growth Projects