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December 24, 2011

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MLP Week Thoughts: Pretty Pretty Pretty Good...

If you don’t get my title this week, then you must not have watched much Curb Your Enthusiasm with Larry David.  If that is the case, I feel sorry for you.  Here is a mashup of the times he used the above catch phrase.

Almost everything globally that has a floating price was higher this week, MLPs included.  The few exceptions included: Silver (down 2%), Chinese stocks (Shanghai Index down 0.9%), natural gas (down 0.4%) and government bonds (TLT down 3.3%).  Everything else had a pretty pretty pretty good week…
The domestic stock market reacted positively to the 489 billion Euros worth of 3 year bank loans at 1% to 500+ banks that was announced by the ECB early in the week.  Then the market further rallied (on weak holiday volume) after the initial unemployment claims surprised in a positive way for the second straight week.  MLPs under-performed the S&P 500 this week, but are still far ahead going into the last 4 trading days of the year.

If MLPs have another week like last week again next week, the index will be at all time highs, last reached in late April of this year.  As I’ve noted before, the peak of the index means very little, considering it doesn’t include distributions.  Looking back at how the MLP Index has performed compared with how that same Index has performed including distributions in the chart below, you can see how important distributions have been, accounting for more than 70% of the return of the Index from inception through Friday.  The Total Return Index is at all time highs currently, having surpassed the April 28th peak back in early December.

(click to embiggen)

Either way, the bottom line is, MLPs have performed very well lately, defying gravity and other risk assets.  It is becoming harder and harder to find MLPs that look cheap, particularly when looking at the large cap MLPs that have led the sector higher.  I generally have a fear of such heights and may be layering on some puts next week to protect against another pullback in 1Q 2012.  Despite the above chart of miraculous growth since 1996, it doesn’t hurt to play defense when things get frothy (beyond the put premiums paid, which hurt a little).
If you do consider buying puts or shorting the sector, however, you should be aware that January has historically been the strongest month for MLP returns by far.  January MLP Index returns have averaged 3.6% over the last 16 years, compared with 0.52% average for all other months.
Good luck, that’s all from me for now, I have to get to sleep so I can celebrate Christmas with my kids at 6am.   Its not that they are going to wake up early for Christmas, they wake up at 6 (or earlier) every single day…should be good times, even with bleary eyes.  By the way, this is my 100th post.  Thanks to everyone who has read it and encouraged me to continue posting since my first entry back in December 2009.
Winners and Losers
Recent IPO LRE was the biggest winner this week, the beneficiary of some glowing initiation pieces.  Another recent E&P MLP IPO, Memorial Production Partners (MEMP), was one of the few MLPs that was down on the week, which is interesting because it is a similar story to LRE, so perhaps when MEMP research comes out in a few weeks, MEMP will shoot up as well.  NKA has been the worst performing MLP by far in 2011, and it fell further behind this week.

News of the (MLP) World

Although it was a light trading volume week and capital markets are closed for the rest of the year, there was plenty of news.

WPZ Announces Acquisition of $750 million Marcellus Gathering System (press release)

  • WPZ had previously announced (12/1) that it was engaged in exclusive negotiations to acquire the assets from Delphi Midstream
  • Funded with $300 million cash and 7.5 million WPZ units issued to seller

LINE Announced Better Than Consensus 2012 Guidance (press release)

  • Announced $880 million capital program, focused on liquids plays (53% of capital program focused on Granite Wash)
  • LINE expects production to grow more than 40% in 2012 to 520 mmcfe/d
  • EBITDA guidance for 2012: $1.175 billion, not including any potential acquisitions

Copano and Magellan Announce Eagle Ford Joint Venture (press release)

  • 100,000 barrels per day line that will deliver Eagle Ford condensate to MMP’s Corpus Christi terminal
  • $150 million cost, shared 50/50
  • Expected to be fully in service by 1Q 2013
  • Returns for the project expect to be around 20%

“ETF in a Box” Firm to Help Yorkville Advisors Launch MLP ETF (press release)

  • Exchange Traded Concepts (ETC) is a firm that helps any firm launch its own ETF within 75 days (website here,
  • ETC uses its exemptive relief approval to work with ETF issuers
  • Certainly won’t be the last MLP ETF we see in the next 12 months, the question is will any of them gain enough assets to be viable or will most end up as Zombie ETFs
  • It will be interesting to see if this ETF has any different structure than the Alerian one that would make it attractive (because it certainly won’t be competing with Alerian’s marketing budget

EVEP Announces new CEO (press release)

  • Mark Houser is being promoted from COO to CEO, remains President
  • John Walker steps down as CEO, retains title of Executive Chairman

EPD and ENB Announce Open Season for Seaway (press release)
NRP Announces Acquisition of 3,600 mineral acres in N. Central Oklahoma (press release)

  • Undisclosed purchase price
  • Funded with cash, expected to be accretive in 2012

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. 

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