MLPs followed the broader market slightly lower this week, with some fireworks on the edges around earnings and deals (PVR and LINE, for example). Natural gas and propane were both up big, but gold futures closed at their lowest point since late June, and are down 7.2% from the high for the year of 1695.4 reached on January 22. Oil hit its lowest point this year on Thursday, and closed down 3.4% for the week.
I look forward to some fresh drama in the markets under the header of sequestration, and I expect to see at least 2 follow on offerings after the capital markets calm of the last few weeks of earnings releases. Its just math that if MLPs need $20bn+ in annual equity capital, that’s at least $400mm per week (based on a very optimistic 50 weeks with the capital markets open). We’ve had a quiet few weeks, and the sector needs to play capital raising catch up, which I expect to weigh on MLPs this week.
Variable distribution MLPs were the big losers for the week (down 4% on average), led by RNF (-11.3%) and PDH (-8.3%). GPs had a mixed week, ranging from ATLS up 4.5% to NSH down 4.0%, but are keeping pace with the Alerian MLP Index for the year so far. ATLS was helped by strong ARP earnings release on Thursday, on which I will be publishing a report on Monday.
MLPs got press in Barron’s for the second straight week. Last week, Barron’s highlighted the “controversy” around LINE’s practice of capitalizing put premiums and its distributable cash flow calculation. More on LINE’s much better week below. This week’s Barron’s cover story hit on the major trends in the sector and tapped real pros in the space, Kyri Loups and Chris Eades, for the discussion. This is when Barron’s MLP coverage is at its best, highlighting the sector as a whole. Barron’s coverage can get into trouble when trying to keep up with individual names, which is understandable, given the multitude of new MLPs and MLP products in recent years.
A few weeks ago, the Joint Committee on Taxation released its latest estimate of what all of the current tax breaks in the tax code cost the government in lost revenue (click here to download the report). The Committee estimates that MLP line items will total $7.0bn for the next 5 years (2012-2016), up from the five year estimate of $1.5bn in 2012’s report, or 4.7x more. Click here to read a good summary of the situation from Bloomberg. The annual number of $1.6bn for 2016 in 2013’s report also quadrupled from $0.4bn estimated for the final year (2015) in 2012’s report.
I’ll be out with more thoughts on this and taxes in a report at some point in the next few weeks, but the short answer is I am not worried about MLPs losing their tax advantage in 2013. Last year, I went through and totaled all the line items up (14 pages worth) and it ended up being $6.1 trillion total. I haven’t done that work yet this year, but if the number is similar in this year’s 5 year estimate, MLPs would still represent around 1/10th of 1% of the overall tax “expenditures”.
Winners and Losers
LINE was the big winner this week, unleashing the power of a fully armed and operational LNCO on the market with its $4.3bn acquisition of Berry Petroleum. LINE’s likes to highlight how its market cap is bigger than the rest of the upstream sector combined, but if they stay busy, LINE may be able to say it acquired more assets in 2013 than all other upstream MLPs combined (certainly the case thus far). I still contend that the acquisition opportunity set is big enough to satiate upstream MLPs large and small. But LINE is operating on a whole other level, and if it had a tougher sounding name it might be considered the evil empire of the upstream MLP space (Linn + Berry sounds like a frozen yogurt flavor).
The flurry of good news on LINE couldn’t have been choreographed better or come at a better time. After playing defense against shorts last week, LINE was on offense this week. The big acquisition lowered leverage (all stock for stock), it was announced as very accretive, and LINE management confirmed intent to change to a monthly distribution. None of this is good news for shorts, which had all the momentum heading into the week.
OXF, which was on the bottom last week, was there again this week, after another double digit percent loss this week. Not sure if it will recover at this point. PVR lowered guidance and reported weak earnings, leading to a double digit drop this week as well.
PVR’s bad week dropped it close to the bottom of the sector for the year. OXF’s free fall continues, and its anti-lead widened vs. all other MLPs. GLP lost the top spot after flying a little too close to the sun YTD, and falling back a bit this week on what appears to be profit taking. STON took over the top spot, but its neck and neck for the top three, which is a fairly motley crew of small cap, special situation MLPs.
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