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January 12, 2014

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MLP Week Thoughts: Rudderless So Far

MLPs struggled again this week, with the Alerian MLP Index down 1.1%, which makes it -2.3% over the first 7 trading days of 2014. The S&P 500 closed the week up slightly and is roughly flat year to date.  The stock market shrugged off the disappointing December jobs report Friday, with the S&P 500 rising 0.2% after falling early on in the trading day.  Other yield-based equities (in particular utilities) and bonds rallied early and throughout the day Friday (the PHLX Utility Index was up 1.4% and the 10 year US treasury rate dropped 10 basis points during the session).  Oil and natural gas were also up Friday.  But the MLP index did not participate, closing down 0.2% Friday.
Weekly MLP Review_1-10-14
While this has been the worst start to the year for the MLP Index in its history, and 5 of the 7 days so far have been negative, the 2.3% decline since the most recent MLP peak doesn’t even qualify as a correction.  We’ve seen the MLP Index decline much more than 2.3% in a single day at times.  This 2014 slow start is more of what technical analysts might call a consolidation, a period of indecision following a large upward move.  The timing of the drawdown is the unique part, as January has historically been the strongest month for MLPs.  Best not to panic in these situations…

Keep Calm

There have been no follow-on equity offerings so far this year, but there is one small IPO on the road.  So, the MLP weakness can probably be attributed to lower commodity prices, some tax gain selling (selling winners at the beginning of a year to avoid paying taxes until 2015), and general expectations that interest rates will have an upward bias for the medium term.  The first large scale MLP-specific news for the year starts next week when Kinder Morgan’s MLP complex releases earnings.
Oil futures were down again this week and are down 5.7% year to date.  Natural gas was the biggest commodity price decliner this week, even with all the cold weather and record natural gas demand.  The natural gas inventory report released this week (data was from last week) was inline with expectations this week, but the same report to be released next week (for data from this very cold week) is expected to show a record inventory withdrawal of more than 300 bcf (Wall Street Journal).  Natural gas traders appear to be pricing in the very welcome fading of the polar vortex.
Winners & Losers
NRP was the big story of the week, cutting its distribution was not a totally unexpected, especially given the struggles of other coal MLPs in recent years, but the market seemed to be surprised by the magnitude of the distribution cut.  Despite weak commodity prices, three upstream MLPs made it into the top 5, but CLMT was the big winner of this week and last week.


Its only 7 trading days into the year, but the wide disparity in returns we saw the last few years seems like it persist in 2014, with a 3000+ basis points spread between the top and bottom of the market already.


News of the (MLP) World


Equity Deals
Just one deal in the market for now, but given that MLPs issued around $30bn in equity last year, expect to see the Wall Street equity offering machine start to ramp up in the coming weeks.

  • Cypress Energy (CELP) launches MLP IPO of 3.75mm common units at midpoint price of $20.00, which would equate to $75mm in gross proceeds (prospectus)
    • Oilfield services MLP with two main lines of business:
      • Saltwater disposal wells (9 owned facilities in Bakken and Permian)
      • Pipeline inspection and integrity services business with 1,700 inspectors employed
    • Midpoint yield at IPO of 7.75%
    • Expected to price around 1/15 (Wednesday)
  • Atlas Resource Partners (ARP) files S-3 to register up to $100mm in common and preferred equity securities (filing)
  • Breitburn Energy (BBEP) files S-3 to register up to $200mm in equity securities (filing)

M&A / Growth Projects

  • Enterprise Products (EPD) announces further expansion of its liquefied propane gas (LPG) export terminal at Oiltanking’s complex on the Houston Ship Channel (press release)
    • Operation will be supported by a 50-year service agreement with Oiltanking Partners (OILT) to provide additional dock space and related services
    • Expanded terminal is expected to be in-service by the end of 2015
    • Terminal economics supported by long-term LPG export agreements
    • Upon completion, EPD’s aggregate capacity will be more than 16mm bbls/month
    • This expansion is in lieu of October 2013 announcement of a new terminal


  • Increases:
    • PAA: $0.615, +2.5% quarter over quarter, +9.3% year over year
    • PAGP: $0.15979, +7.2% increase over initial distribution
  • Distribution Cut:
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