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December 8, 2013
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MLPs had a rough week. The Alerian MLP Index was down 2.7%, and the midstream-focused Cushing 30 and Alerian MLP Infrastructure indices were down more than 3.0% each. It was the worst week since the last week of May when the Alerian MLP Index was down 4.3%.
The macro drivers were mostly neutral to positive this week. The S&P 500 was flat, commodity prices were up (both oil and natural gas), and November employment data came in better than expected. The 11 basis points spike in the 10 yr interest rate and the flood of MLP paper hitting the market this week in the form of IPOs and follow-on offerings provided some headwinds for MLPs. But this week’s MLP price action was mostly related to the MLPs themselves, and two MLP families in particular that announced their 2014 expectations: Kinder Morgan and Crestwood. More on that below.
Oil rebounded 5.4% and natural gas broke through the good side of $4.00, both bullish for MLPs broadly. But the cold weather that’s driving up natural gas prices could also impact the 4Q operating results of upstream and gathering & processing MLPs. Also since our last post a few weeks ago, crude oil spreads have widened, both the WTI-Brent (shown below) and the WTI-LLS. If this persists, expect crude focused midstream players to show the benefits in 4Q earnings releases.
Also, since I last posted, we passed through the end of another month. For November, the Alerian MLP Total Return Index was up 0.9% compared, and is up 25.6% year to date through 11/30. Below is a recap of the Alerian MLP Index returns across various time periods through 11/30. Looking forward, on average, December has been a positive month, with average returns since 1996 of 1.4%. Last December was the second worst month of 2012 with a -3.7% return, but the Fiscal Cliff was the overriding cause.
Winners & Losers
Delek was the big winner this week on no company specific news, but there was a positive initiation report from Howard Weil that came out Monday. While other refined products MLP subsidiaries were universally down this week (MPLX, PSXP, HEP, WNRL), DKL may have entered investor radars as a smaller and lower growth comp to the Valero MLP IPO that launched this week.
QEPM (+4.8%) also had a notable positive move this week after its parent company (QEP Resources) announced the spinoff of its midstream business, including its G.P. and L.P. interests in QEPM. It is unclear how much value this transaction in itself will “unlock”, but the market appears to like the idea of having a management team focused on building the midstream business.
On the downside this week, EPB (-15.5%) had the biggest fall, which was the market’s reaction to Kinder Morgan’s 2014 guidance released Tuesday that calls for EPB to maintain its current quarterly distribution rate for the next 12 months, implying 2% year over year growth (press release). By comparison, EPB’s last twelve months distribution growth was 12.1% and its 3 year distribution CAGR was 16.6%. The road to this week for EPB started more than 2 years ago when KMI announced the acquisition of EP. Right here at this blog and echoed by research analysts at the time, it was noted that EPB got the short end of that transaction. The broader question of KMP’s slowing growth trend was actually the topic of my second post ever 4 years ago, appears to be playing out.
There was also a trend this week of smaller midstream MLPs that have under-performed YTD trading down sharply, including SXE, EROC and FISH (pictured above and below). The whole sector traded off on average around 2.7%, and when that happens, investors tend to reduce exposure to smaller, high beta MLPs. This gets exacerbated for geographically concentrated assets in advance of a cold fourth quarter that could lead to weaker results. Scale and geographic diversification are important.
No material changes in the top 5 and bottom 5 year to date this week. SMLP popped up into the top five, replacing EQM. It looks like it may be a tight race to the bottom for 2013 overall, with EROC edging closer to the bottom spot currently held by EVEP.
Not pictured are the MLPs and C-corps that own G.P. interests in MLPs, but CEQP was down 15.7% on distribution guidance that was basically the same as its underlying MLP (press release). That is unusual for a G.P., but CEQP has operating assets besides its financial assets in CMLP. CEQP joins a host of other MLPs that are pointing towards 2015 for brighter days.
Our team will be attending the Wells Fargo MLP conference next week, and we expect to hear plenty of chatter regarding recently lowered expectations for some MLPs and what this means for the health of the entire sector. My general view is that these are isolated cases and it argues for active management within the MLP sector by people that are closely tracking individual MLPs.
News of the (MLP) World
There were 4 equity offerings that priced this week, as well as two IPOs (VLP and CQH) and a follow-on offering still on the road and expected to price next week. There is a big holiday push to get these deals done before the market closes for good. It is unlikely that there will be another MLP-related IPO for the rest of the year after CQH prices next week. There have been 19 MLP IPOs, 1 GP IPO and 1 corporate L.P. interest holding company (CQH).
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