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March 6, 2016

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MLP Week Thoughts: Marching Higher

The MLP Index rallied another 7.2% this week and has now produced more than 30% total returns since the bottom on 2/11.  Small coincidence that oil prices closed this week 37% higher than the price on that same date in February.  Over that time period, natural gas prices have continued to drift lower, but that hasn’t hurt MLPs (so far).
This week’s MLP performance ranks 9th best all-time, four spots behind the 5th best all time week that happened two weeks ago.  The violent bounce still leaves the MLP Index down 6.4% for the year and -35.8% year over year.
In the first week of the MLP bounce, the rally was led by larger MLPs, while this third week, it was smaller and riskier MLPs.  Each 10% move in oil prices seems to be validating the sustainable existence of an increasing number of MLPs.  Certain MLPs that may be distressed in a sub $35/bbl oil environment start to look like solid bets to sustain cash flow as oil trends higher and retail funds return.  Action like this is typical of the early stages of a recovery, but it’s happened very quickly.
Status Update
We blew through another month end this week.  MLPs didn’t quite finish February positive, but the intra-month rally was very impressive.  With February down 0.5%, we have now had four negative months in a row.  March is off to a very good start up 5.8% in just 4 days, and if funds keep flowing (positive in each of the first two months), equity issuance isn’t too high (none so far), and oil prices hold above $30/bbl, MLPs have a good chance of having their first positive month of 2016.
Status Update_3-4-16
Poll Question: Winners from Here
Sentiment has clearly improved for gathering & processing MLPs in the last 30 days, and they trade at large discounts to other midstream MLP subsectors on any of the metrics above.  At the same time, drilling activity is not improving, and oil prices seem to be rallying on production decline clarity, which doesn’t seem bullish for gathering & processing volumes.  On the other hand, defensive MLP subsectors like natural gas pipeline MLPs, propane MLPs and refined products pipeline MLPs have outperformed in the downturn and at some point may lag if riskier MLPs continue to catch a bid.
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Winners & Losers
The top five performers all posted returns of ~40%+ with no clear trend except the list is comprised of names that had massively underperformed YTD (AZUR, NRP, CELP) and names that are highly levered to oil prices (SDLP, MEMP).  There was no clear trend or news among the bottom five as all companies represent different MLP sectors.
Speaking of massive underperformance, CEQP makes the bottom 5 and is down double digits again in a positive MLP week.  Uncertainty about strategic direction and the Quicksilver contract rejection are weighing on CEQP.  DKL’s sector-leading performance last week backed up this week.
GMLP jumped into the top five YTD performers replacing CNNX after posting strong returns this week on well-received earnings.  AZUR climbed out of the bottom five and was replaced by CLMT.  Incredible divergence for this early in the year, with the bottom 5 consisting wholly of 40% decliners, most of which didn’t look so bad on a relative basis a few weeks ago, but haven’t participated in the rally.
General Partner Holding Companies
General partners outperformed MLPs overall again this week, led by Archrock’s 50%+ move.  WGP was the only repeat name in the top 5 this week, while all 3 of last week’s bottom 3 were near the top this week.
News of the (MLP) World
It was a very quiet for MLP transactions.  There were no MLP offerings, but there were a few filings that signal MLPs gearing up to issue equity.  By our estimate, February saw more than $900mm of net inflows into MLP open end funds, ETFs and ETNs, which was more than double the inflow from January.  With new money flowing in, and not equity going out, MLP prices have had a chance to recover.  Like last week, we saw several more E&P offerings, boosting liquidity into the energy sector and helping the high yield market trade better, adding to the tailwinds for the MLP sector.
Equity Filings

  • Shell Midstream (SHLX) filed equity distribution agreement to raise up to $300mm in common units at-the-market (filing)
  • Phillips 66 Partners (PSXP) filed registration statement (S-3) to register to sell up to $250mm of common units (filing)
  • Spectra Energy Corp (SE) filed equity distribution agreement to raise up to $500mm in common shares at-the-market (filing)


  • VNR suspends distributions on common and preferred units (press release)
  • No ruling yet in the Crestwood / Quicksilver contract rejection case (Reuters)
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