Triangles background

August 8, 2011

Viewed 1147 times

MLP Week Thoughts: Look out Below

MLPs dropped 6.1% this week, which is the 9th worst week over week drop since 2000 for MLPs, and the worst week since the “flash crash” week of May 2010, when MLPs were down 7.9%.  It’s not uncommon for MLPs to drop on the week when many of them trade ex-dividend during the week, which was the case this week.  Clearly, however, this week’s trading action was all about the broader market and commodity price collapse which lead MLPs lower despite strong earnings.  WTI oil price was down 9.4% this week, and the S&P 500 was down 7.2%.  In that context, MLPs performed well this week.  Also, the 10-year treasury rate dropped 25 basis points, which means the average MLP yield (at around 6.91%) is now 435 basis points above the 10-year, about 100 basis points wider than the average historical spread of 334 basis points.

About noon on Friday, things looked much worse than they closed later in the afternoon.  Around noon, MLPs hit an intra-day low of 322.6, which was 6.6% below the previous close of 345.3 and 10.9% lower than the previous Friday’s close.  It was a very short, very steep decline that almost immediately reversed, as shown in the chart below.  MLPs are not the most liquid securities out there, so a single large seller can have serious impact on MLPs.  It’s likely a large institution was either unwinding swaps or just selling large positions during the hour or so when MLPs dropped so much.  We may see more of those big sellers this week if the market continues to decline and people begin to see their MLP holdings as a place to go to raise cash.

There wasn’t much news this week outside of earnings reports.  Significant earnings beats included APL, OKS, MMP and PAA.  Significant earnings misses incuded MMLP, BWP, ETP and BPL.  There was some HR news, as EXLP announced its CEO has resigned, and EPD appointed a new head of its Gulf Coast natural gas gathering and processing unit.  There was some financing news, as ETE announced completion of its syndication of $3.7 billion in acquisition financing for SUG acquisition, and OKS entered into a new credit facility.
See below for a chart of the 5 worst performing MLPs this week and the 5 best performing MLPs.  BIP was the only positive MLP, and shipping MLPs NMM and CPLP lead the losers.  MMLP was hit hard after earnings, down almost 18% this week.

This week should be another where we see more influence from broader markets than usual, given the downgrade by S&P of the U.S.  While at a birthday party for one of my daughter’s friends, I saw something that reminded me of the markets recently, although my son’s big smile is certainly not indicative of current investor sentiment as they slide down.  Enjoy, and good luck this week.

Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. 

No posts matching your criteria