May 22, 2016
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MLPs rallied for the 12th week in 15 off the bottom, finishing up 4.4% overall since last Friday. Total return for the MLP Index is 10% year to date. MLPs are outperforming the S&P 500 over the last 1-month, 3-months and 6-months.
Oil prices continued higher this week, helped by continued global supply outages and a solid refined products inventory draw. Propane prices hit a 52-week high Tuesday, but remain roughly 50% lower than September 2014 highs.
Rate In-Sensitivity: Fed minutes trumped hopeful markets Wednesday, causing a selloff in risk assets and in particular yield-based equities like utilities and MLPs. Thursday and Friday saw MLPs snap back. The upside of investors not as focused on yield as a valuation metric these days is that MLPs don’t have as much sensitivity to rising rates, maybe.
Technical Progress: MLPs started the year down 28% in 5 weeks, but have produced an astonishing 53% total return since then. On 2/11, MLP index yielded 12%, and today it yields less than 7.5%. The MLP price index closed above 300 for the first time since November on Thursday, and while it hasn’t seen 400 since July 2015, MLP charts continue to get healthier.
Buying Dips Where Available: Because the rally has been so furious, it’s been hard to find entry points for anyone that’s been watching MLPs shoot higher from the sidelines. It seems like investors took the brief dip Wednesday as an opportunity to buy MLPs. Large, liquid MLPs outperformed Thursday and G&P MLPs outperformed Friday. Equity risk premiums are dropping for the more commodity sensitive midstream players. People are buying what is perceived as cheap and what will likely continue to work in a rising commodity price and drilling activity environment.
Poll Question Review – Plaintive Expectations
Last week’s question focused on GP/LP consolidations, specifically the two most presumptive ones (RRMS/SEMG and PAA/PAGP), at least based on what I hear and read. Oil prices continue to improve, improving the outlook for both PAA and RRMS, and it appears to be making the GP/LP consolidations less attractive and no longer the slam dunk they might have been absent the rally.
The poll question results were mixed, but seemed to indicate a high probability (67% of respondents) that at least 1 of RRMS or PAA will consolidate with their respective GP in some way. 33% of respondents expecting neither RRMS or PAA to consolidate with its respective GP. Speculation is rampant that PAA may announce some type of restructuring involving the IDRs at the analyst day this week, which would probably be premature at this point.
Winners & Losers
The announcement that Range Resources was acquiring Memorial Resource Development caused PTXP to rip higher this week on improved counterparty profile and potential additional development opportunities. RRMS rallied double digits again. TEP’s final announcement regarding the REX acquisition proved to be the most impactful, as the market responded very positively to the update and contract extension, plus additional year of top-tier distribution growth guidance.
Equity issuance is proving challenging to digest. Recent issuers PSXP, SHLX and WNRL struggled this week. Very thinly-traded DKL traded poorly as well on follow-through from weaker 1Q results and possibly some overhang at this point.
RRMS is now the best performing MLP in the entire sector for the year, following its stunning reversal and non-stop rally. ENBL joined the top 5 this week as well. On the downside, some of the biggest winners from last year, SHLX and DKL, dropped into the bottom 5 for the year this week.
General Partner Holdings Companies
TEGP stole the show this week with updated guidance, contract extension and vision for Rockies Express, not to mention best-in-class distribution growth guidance for the next few years. WMB diverged from ETE pretty dramatically, which I don’t believe means the market thinks the merger is any more likely than last week. SEMG again was in the top 5, but lagged its subsidiary MLP.
News of the (MLP) World
MLP equity offerings continued this week. No change to key traits of these deals and other recent deals: high re-offer discounts, bought deals with substantial amount of units pre-sold before launch, and issuers with refinery logistics and liquids assets. The equity capital market remain challenged, but MLPs that are trading ok and are willing to sell equity at an 8% discount are able to get deals done. Smaller MLPs with limited float like WNRL are going to continue to come to market because the small trading volume limits ATM ability and sponsors have already taken back units throughout 2015 and may have reached their limit.
Financing
M&A / Growth
Other