July 18, 2015
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MLPs declined 2.7% this week, hurt by weaker oil prices and two equity deals that proved particularly hard for the market to digest. The back half of the week was brutal, with the index declining 4.4% over the last 3 days of the week, each day more than 1% negative. Any M&A read through to other MLPs created Monday with the MWE/MPLX merger was gone by Wednesday. The equal weight version of the AMZ was down much more than the AMZ as the MWE and MPLX price movements balance themselves out in an equal weight index and the few remaining upstream MLPs were sharply negative impacting the equal weight index more than the market cap weighted AMZ.
We were off the lows last week, but this week, the MLP Index established a fresh 52-week low with Friday’s close. The MLP Index is 27.9% below (24.6% including distributions) its all-time peak at the end of August last year, 25.1% (20.7% with distributions) below 12 months ago, and 14.1% below its recent peak in May.
Oil was 3.6% lower, grinding lower throughout the week, with the Iran deal most often cited as the reason for the weakness. But, dollar strength relative to European and Canadian currency didn’t help oil prices. The rig count released Friday indicated a week over week decline for the US, which helped stem the tide on weak oil.
Meat Reversion
The MLP market did its best to choke down more equity issuance this week, in the face of fund outflows and what appears to be short selling. The MLP market is finding it increasingly difficult to digest equity of almost any size, and given a lack of new money flowing in, dedicated MLP institutions are having to sell existing MLP positions to fund purchases in offerings, weighing on the entire sector.
In a post published in March of last year, I compared the MLP market to the calf scramble at the Houston Livestock Show and Rodeo. At the time, there was more money than MLP ideas, and certain stocks were chased higher than they probably should have been.
Fast forward to today and I’m struck by another meat-related image. The current market can be compared with a competitive eater in the final minutes of the Nathan’s Hot Dog eating contest, trying to squeeze a few last hot dogs into his already stuffed mouth without gagging.
The balance of fund flows and equity issuance has been a challenge for the sector over the years. The MLP sector could not have grown as much as it has over the years without growing its investor base. But there have been brief times when MLPs have issued so much equity in a short period of time that the market gets off balance. In the calf scramble post, it seemed like the balance had swung too far in the direction of fund flows and MLP prices climbed higher. We’ve now tipped way in the other direction as limited new investor activity in the face of equity issuance is pressuring prices lower.
Poll Question Recap
Last week, we asked readers to choose which type of MLP they’d want to own in a rising rate environment. The high-growth MLP with a 2% yield was the winner with 44% of the vote, but was closely followed by the 6% yield, 6% growth MLP that garnered 42% of the votes. The highest yield MLP with no growth came in a distant third place with 11%. In the real world this week, the answer was none of the above.
Winners & Losers The most relevant MLPs on the chart below are the biggest winner, MWE, and the biggest midstream loser, MPLX. The remaining top and bottom 5 MLPs are just noise, with pockets of strength among small cap MLPs and another haircut to upstream MLPs on the downside.
On the year to date chart, DKL dropped from the top spot and TLP dropped from the top 5 altogether, replaced by USAC.
General Partner Holding Companies
In the aftermath of the MWE/MPLX merger announcement, long-rumored potential takeout candidate OKE caught a bid along with other M&A targets SEMG and TRGP. Not surprisingly, their subsidiary MLPs caught no such bid. Overall, GPs were ugly this week, and while the median performance was better than the Alerian MLP Index, a cap-weighted average would be much worse, given the biggest GP (ETE) was down the most.
News of the (MLP) World
A staggering amount of news this week, and MLP earnings season hasn’t even really started yet. M&A activity is clearly ramping up, with nearly $25bn worth of M&A announced this week. To help finance all that, equity deals had to be executed, and in a market as weak as this, the $600mm of MLP equity issued weighed on the sector like only billions of dollars of equity would have in better times. Some MLPs that announced better than expected distribution growth saw positive price performance (TEP and CNNX), but the effects were temporary or muted by sector-wide selling.
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