July 17, 2016
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MLPs resumed their rally this week, the MLP Index hit a new year-to-date high and outperformed oil prices again. MLPs also beat the S&P and utilities, despite a 22 basis points increase in the U.S. 10 year rate week over week. MLPs reacted positively to company-specific announcements that offered clarity to cloudy situations (PAA) or highlighted execution towards a healthier financial position (KMI). Other MLPs rallied on the hope of positive strategic announcements still pending (WMB/WPZ, EEP/MEP).
Major strategic announcements have been positively received, as some level of certainty is preferred over looming issues in need of a fix. See below for a list of major strategic announcements this year (several of which were accompanied by distribution cuts) for evidence.
Last year, strategic announcements, notably Targa’s rollup and MPLX’s acquisition of MWE were both met with heavy selling. Teekay’s surprise distribution cuts across its MLP complex was likewise not appreciated by the market.
This year, clean up trades have been almost universally positive. There are a few MLPs that remain “broken” to some degree, either with regards to financing capital plans, covering their distribution or high leverage. Based on the recent trend, regardless of what lever these MLPs choose to pull, they will likely find the market receptive.
Poll Question Recap
Midstream earnings season is back, starting with KMI’s release on Wednesday night. Next week starts earnings season, which should prove to be very interesting given that production declines are ongoing, producer budgets for 2017 are at least a quarter away, but light (i.e. growth in throughput) is beginning to emerge at the end of the tunnel.
Last week we had a poll that asked what the biggest theme would be for 2Q earnings season. Balance sheet concerns (equity needs and leverage) was the winning choice with 35% of the vote. Addressing balance sheet and funding concerns has been rewarded lately (see KMI), so further execution towards lower leverage targets should be welcomed by the market.
Beyond balance sheet, the next winner was medium term growth (22% of vote), which would be a continuation of what we saw last quarter where MLPs are starting to look forward towards a resumption in production activity that could lead to volume growth in certain regions. Growth outlook earned more votes than near-term volume declines, which is inline with what I would expect, that while the market will be concerned with near-term volume trends, they will be willing to look beyond the near-term to tangible signs of activity resumption and volume growth.
Winners & Losers
Small cap MLPs dominated the top 5, with not much of a pattern, other than some of the recent MLPs that have rallied have been heretofore overlooked in the initial re-rating of MLPs since the lows early this year. Larger MLPs SXL and WES made the bottom 5 this week, but the downside movements weren’t very large across the board.
Not pictured here is PAA, which rallied 6.1% week over week, including more than 10% on the day it announced the simplification transaction and distribution cut. For the second straight week, very small MLPs have dominated the top 5, an indication that some MLP buyers have extended their search for value beyond the most prominent names.
Year to date, SXCP’s wild ride continued this week, with another top 5 weekly finish that ballooned its YTD lead. CNNX rejoined the top 5. On the downside, CPLP gained on the rest of the sector with a big week, but remains the worst performer so far this year.
General Partner Holding Companies
PAGP was the big winner in the sector this week, as it was confirmed PAA would be the acquirer of the GP interest at a premium as opposed to the recent trend of GPs buying in MLPs. WMB was also a strong performer, perhaps helped by the PAGP announcement, then clearly helped further by reports of interest in their Canadian asset sale process.
KMI (not pictured below) rallied 13.4% this week, popping on its announcement Monday and grinding higher the rest of the week. The rest of the GPs traded within a reasonably tight band. ENLC and NSH underperformed the group again this week, while TEGP made it two straight weeks in the top 5.
News of the (MLP) World
It was a heavy news week in the MLP space, with basically $1bn+ worth of M&A activity announced or reported on each day this week. Another big utility JV and another IDR elimination transaction were the biggest news items.
Action north of the border was pretty intense as well, with a $1.1bn pipeline changing hands and reports of bidding for WMB’s Canadian assets moving the market Thursday. Canadian midstream companies held up better than MLPs over the last 18 months and their relative financial strength has positioned them well to pick off assets and whole companies (see CPGX).
Financing
M&A / Growth
Other