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July 4, 2011

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MLP Week Thoughts: Summer Streaking!


5 consecutive positive days for the S&P 500, 5 consecutive days of rising interest rates, and 10 consecutive positive days for the MLP Index, which was up 2.7% this week and 5.6% over the 10 day winning streak.

If the MLP Index closes up for Tuesday, making the streak 11 days, this current streak would enter a very small club.  Streaks of more than 10 positive days in a row for the MLPs Index have actually only happened 6 times before: October 2010: 14 days (6.2% change during streak), October 2009: 11 days (5.8%% change), July 2007 (4.4% change), January 2005: 11 days (6.9% change), September 2004: 13 days (4.8% change), and December 2001 / January 2002: 16 days (7.6% change).  It’s a mixed bag historically as to what happens in the 30 days after the streaks: 3 out of the 6 times it has happened, the index was lower 30 days later, and 3 out of 6 times it was higher.

Lego Streaker
(lego streaker, from Minifig on

So, all in all, a pretty nice way to finish the quarter.  The 63 basis points move in the 10-year US Treasury rate, from 2.87% last week, all the way to 3.50% this week, is slightly alarming, but the market doesn’t seem to care about that just yet.

For the second quarter (ended Thursday), the MLP index was down 0.7% on a total return basis and down 2.2% not including the distributions, but at one point in mid-May the index was down 7.5%.  Good news is that only twice in the last 40 quarters (10 years) has the MLP index posted back to back negative quarters: 3Q/4Q 2008 and 1Q/2Q 2002.  There have only been 9 negative quarters out of 40, or just less than 25% of the time.  The negative quarters don’t seem to follow a seasonal pattern either, with each quarter having at least 2 negative quarters in the last 10 years.  Not sure any of that means anything, but the probability of the MLP index having a follow-up negative quarter appears small.

Alerian MLP Index performance 2Q 2011

After the last negative quarter (4Q 2008), MLPs were up 11% in the quarter that followed, but that bounce was off historic lows, and the worst consecutive quarters ever for MLPs, so I don’t think we see a repeat of that, but I believe the MLP index reaches new highs this quarter, on the backs of increased distributions more than yield compression, probably right before distribution ex-dates in August.  Given how small the difference between a negative and a positive quarter this quarter was, a negative quarter in 3Q wouldn’t surprise me.

Baby number 3 is probably going to pop out today, July 4th, so I might post even more sporadically than usual this week…


News Wrap:

Surprise ETE Distribution Announcement – ETE announced its second quarter distribution a month early this year, and it is clearly an attempt to sway the SUG acquisition deal in ETE’s favor.  The partnership raised its distributin 11.6% from last quarter.  Usually, ETP and RGNC would announce distributions concurrent with the ETE distribution announcement, because ETE’s ability to issue equity is almost exclusively a result of the distribution levels at ETP and RGNC.  Not this time.

Last year, ETE announced its second quarter distribution in a joint announcement with ETP on July 29th.  In order to make this 11.6% distribution possible, ETE management will have to either (1) issue equity at RGNC or ETP, (2) raise distributions at ETP and RGNC, or (3) dip below 1.0x coverage and pay the distribution with borrowings at ETE.  The question is, what happens if ETE doesn’t win the SUG deal, what happens to ETE’s inflated distribution?  Do they cut it back down, citing the unusual circumstances around the deal?  We’ll see.

El Paso Announces $745 million Drop-Down Acquisition, 4.4% distribution increase – EPB bought from El Paso Corp (EP) an additional 28% interest in Colorado Interstate Gas Company (CIG) and the remaining 15% of Southern Natural Gas Company (SNG) that it didn’t previous own.  EPB nows own 86% of CIG and 100% of SNG.  Management also announced a 4.4% increase in distributions from last quarter, bringing the year over year growth rate to 20%.

EPB has now grown its distribution for 13 consecutive quarters since IPO, at an annual rate of approximately 18%, the fastest rate of any MLP, (and second only to AHGP, 24% annually, if you include the GPs) during that time.  Very impressive by EPB, and this level of distribution growth is set to continue for another few years given the amount of growth projects on tap for EPB as well as the amount of assets EP still has to drop down.

Enbridge Energy Partners Does Equity – EEP launched and priced a quick equity $210 million offering this week (priced Tuesday) to pay down debt, at $30 per unit, or 6.85% yield.  Great timing for EEP, which was able to price its equity deal at only 2.9% below its previous closing price.  The strength of broader markets and the relatively high yield helped EEP get favorable pricing, but there also hasn’t been much equity issued in the last month or so.  Hopefully, equity issuance remains quiet in labor day, to allow for MLPs to build some momentum.

Sunoco Logistics Partners with $100mm Drop-Down from SUN – SXL is buying Eagle Point Tank Farm from its parent company, SUN, for $100mm of distribution deferred units.

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. Long ETP, RGNC, EPB.

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