MLPs edged up again this week, and so did the broader stock market. The MLP Index finished February up 0.87% including distributions, which was the weakest February performance since 2009 (-5.4%). March has been a weaker than average month for MLPs, and was down in 2012 and 2011. I would not be surprised to see MLPs drop slightly as a sector in March, and like most of the investing community, I’ve been surprised a correction, even a mild one, hasn’t happened yet. Proceed with caution and make sure you pick the right MLPs if you’re bringing new money to the sector right now. If you don’t know how to pick the right ones, hire someone like me, or buy a pooled investment vehicle of some kind.
Oil futures have been up and down for the year, but was down all week, making YTD lows on 3 of the 5 trading days, including Friday’s close below $91 per barrel. Natural gas futures were up for the second straight week, and natural gas storage chart is starting to look a little better, with storage levels 12% below a year ago (but still 16% higher then the 5 year average). There have been plenty of false start with natural gas prices recently, and I’m certainly no expert on the dynamics of the natural gas storage market, but natural gas at $3.42/mmbtu is much better than spot prices a year ago of less than $2.50/mmbtu.
For the year so far, all things MLP have returned on average roughly the same amount, with variable distribution MLPs, GP holding companies and the MLP Index all producing a little better than 13% total return. And that 13%+ total return has been much better than the broader stock markets so far this year, in a reversal of 2012 results.
Big Deal February
This week saw another $3.0bn in announced M&A transactions, bringing total announced M&A value for February to $7.8bn, after a very big January M&A amount of $6.8bn. MLP M&A is on pace for more than $87bn in M&A this year, which would be a record by nearly $40bn over last year’s $52.5bn record MLP M&A. This week there were 3 sizable drop down acquisitions this week (into RGP, DPM and WES), and Evercore partners was the big winner on the advisory side, advising on 2 of the 3 transactions. That means there were some unhappy, possibly chewed-out investment bankers that didn’t advise on the deals.
The good news for unhappy bankers is there is probably plenty more M&A up for grabs in the deal pipeline. And all that M&A will need to get financed, somehow, which will generate plenty of fees to share. I’m expecting a big month for equity issuance in March, so position your portfolios accordingly, especially if you own an MLP that recently announced an acquisition, hasn’t issued equity in a more than a year, or has high leverage.
Because MLPs Got High
Regular readers are used to seeing the same charts here every week, especially since my posting has slowed to once a week. But below is a fun chart that I posted about a year ago regarding the MLP Index and all-time highs. The point of the chart is that MLPs have seemed expensive compared with their recent trading history for going on 17 years now, with the exception of 2003 and 2008. So far this year, the Alerian MLP Total Retun Index has already made 16 new all time highs in 2013, well ahead of the pace of the last few years, and on pace for 96 new all time highs. We will not get to 96, but we’ll probably see a few more all time highs this year.
Winners & Losers
OKS beat consensus expectations for 4Q 2012, but lowered 2013 guidance, and its units were off 6.4% for the week. DPM announced a large drop down acquisition, but also executed a $446.9mm follow on equity offering, which led to weakness. EVEP earnings provided no real update on the Utica sale process, leading to what appeared to be frustration selling on Friday. On the plus side, TLP and CLMT were up big on no news. CQP was up big after another round of equity was announced as completed via a registered direct offering.
CLMT’s big week catapulted it to the top spot in the sector, alongside GLP. STON dropped out of the top five after a 2.4% drop for the week. There are only 5 MLPs that have negative total returns YTD, with EEQ as the only newcomer to the list this week.
News of the (MLP) World
A very active M&A week, fairly active equity week with some unusual equity deals getting done, but no debt deals. Also, I issued a report on EROC’s earnings beat, reiterating my price target and adjusting my estimates. Email me if you weren’t on the distribution and would like the report. Other covered MLPs (QRE, MEMP and VNR) report earnings next week, so stay tuned for more reports next week.