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July 13, 2014

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MLP Week Thoughts: Short Shallow Summer Slide

Between the end of last week and the beginning of this week, the Alerian MLP Index had 4 straight negative trading days where it declined 3.0%.  The index recovered 1.0% Wednesday to Friday, to finish the week down 0.6%, slightly ahead of the S&P 500.  The Equal Weight MLP Index was down twice as much as the MLP Index, which means smaller MLPs on average underperformed this week.
Interest rates were down, perhaps helping the defensive trade of utilities to outperform.  MLPs had the tailwind of lower rates and the headwind of dropping natural gas and oil prices.  Heading into earnings season, investor focus should shift back to fundamentals (including commodity prices), and maybe that contributed to MLP underperformance relative to utilities.
AMZ Weekly_7-11-14
The last time the index had 4+ days of declines was the 5 days in a row of declines from March 6 to 13th of this year, so it’s been a while, but it tends to happen at least every few months, even in very strong years for MLPs.
Pullbacks for MLPs have been rare the last several years, and it seems like the sector’s investor base has expanded substantially in between each new pullback, so it’s always interesting to see which MLPs outperform in a sell-off.  Below is a chart of the bottom 10 and top 10 performers during the 4 day selloff.
Performers in selloff
It’s quite a mix in both columns, but of the top ten, I see them as skewing smaller in terms of trading liquidity and public float.  Names like NGLS, OKS, EPB, and EEP in the bottom 10 column all have more trading volume and liquidity than any of the top 10 performing MLPs, with the possible exception of BWP.  In an increasingly institutional market, when selling happens en masse, names that institutions can sell easily probably get sold first.  Food for thought as you build your MLP portfolio.
My readers aren’t fazed by the recent very short pullback, and remain optimistic.  84% of all respondents to my poll question last week responded yes to the question: “Will the Alerian MLP Index make another new all-time high before the year is over?” Given that we sit just 2.1% away from the all-time high, a new high point is certainly possible this year, this quarter and this month even.
Winners & Losers:
VLP went from first last week to worst this week, dropping 7.5% to take the bottom spot.  Other high flying sand MLP HCLP and drop-down growth stories GLOP and WNRL took a tumble this week as well, as it seemed the market was quick to sell winners.  Buyers opted for higher-yielding MLPs like CMLP and NS, and less high flying drop-down growth stories ENLK and SUSP, all of which made the top 5 this week. Also, the market seemed to like GLP’s foray into Texas with its JV with KSU for a new terminal.
MLP Top5_7-11-14
MLP Top5_7-11-14_Chart
PSXP is still way out in front for the year, followed closely by 4 other high distribution growth MLPs.  GLOP dropped out of the top 5, and HCLP dropped two spots, pushing TEP and EQM up the ranks, and making room for OILT to rejoin the top five.  On the downside, EROC dropped to second worst performing MLP, and CMLP inched higher.
MLP Top5_YTD_7-11-14
MLP Top5_YTD_7-11-14_Chart
News of the (MLP) World
Another fairly quiet week of MLP news, as is to be expected heading into earnings season.  The Kinder Morgan complex kicks it off on Wednesday.  We got a few early distribution announcements this week, and those will pick up their frequency next week as well.

  • Memorial Production (MEMP) prices public offering of 8.6mm common units at $22.50/unit, raising $193.5mm in gross proceeds (press release)
    • Overnight block trade, priced at 5.9% discount to prior close


  • Summit Midstream (SMLP) prices public offering of $300mm of 5.5% senior notes due 2022 at par (press release)

M&A / Growth

  • NGL Energy (NGL) announces offer to acquire outstanding units of TransMontaigne Partners (TLP) in transaction valued at $564mm (press release)
    • NGL already owns 20% of TLP units as a result of the acquisition of TLP’s G.P. last month
    • Offer is to exchange TLP units for NGL units on a 1:1 basis
  • NGL Energy (NGL) announces development of 5 salt water disposal facilities in the Eagle Ford and Permian Basins (press release)
    • New facilities include 6 recently completed disposal wells for combined cost of $83mm, located in the Eagle Ford shale and Permian Basin
    • Facilities are expected to produce $16mm in annual EBITDA, implying a multiple of 5.2x, appropriate for quick payback, low barriers to entry assets like this
  • Global Partners (GLP) and railroad operator Kansas City Southern announce plans to jointly develop a unit train terminal in Port Arthur, TX (press release)
    • The waterborne terminal will serve initially as a destination for heavy crude from Western Canada utilizing 340,000 barrels of initial storage capacity
    • Facility will have an initial capacity of 2 unit trains per day
  • Teekay LNG Partners (TGP) announces acquisition of interests in 4 LNG carriers to be constructed and delivered between late 2017 and early 2019 (press release)
    • Each vessel will have 174,000 cubic meters of LNG carrying capacity
    • Interests acquired from BG Group
    • Vessels will operate under 20-year contracts with a subsidiary of BG Group
  • BridgeTex Pipeline, a JV between Magellan Midstream (MMP) and Occidental Petroleum Corp, announces  supplemental open season for additional transportation commitments (press release)

Industry / Other

  • Andrew Atterbury joins the board of Western Refining Logistics (WNRL) (press release)
    • Former Inergy executive (with impeccable timing), and an reader
  • Crestwood Midstream (CMLP) has underground pipeline leak of an estimated 24,000 barrels of saltwater and condensate mix on a reservation in North Dakota (Fuel Fix)
    • Spill apparently had gone undetected for several days
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