MLPs were volatile this week, trading in a different direction each of the five trading days. Down Monday, up Tuesday, down Wednesday, up Thursday, and down Friday. The price action reflects commodity price uncertainty that is leading to growth capex uncertainty. Growth capex has been the principal driver of distribution growth the last few years (outside of the drop down set of MLPs). The Alerian MLP Index (AMZ) traded down 2.5% for the week, and is down 3.9% over the last 2 weeks.
The S&P 500 (-1.6%) and utilities (-4.3%) were each lower this week for a second consecutive week. Oil price was flat this week, although it trended lower in the final two sessions of the week (-3.7% during that time). Natural gas prices recovered this week, but remains below $3.00 in the near-term futures market. NGLs fell back after rallying the last few weeks. The 10-year U.S. treasury rate rose 25 basis points this week, which didn’t help MLPs or utilities, and seemed to have a strong effect on the top tier growth MLPs on Friday.
Oil Storage Threat Level Rising
Prominent MLP management teams, sell-side research analysts, commodity consultants and even the Wall Street Journal (see here) are all discussing the level of storage in the Cushing, the U.S. overall and the world. The idea is that if we keep adding oil to storage, eventually we will run out of oil storage, leading to another leg down in oil prices.
Running out of storage has quickly become a consensus opinion, but the oil price has not yet collapsed, which indicates that there is a clear chance that we don’t reach capacity. The storage issues is a complicated triangulation between capacity limits, supply that is trying to slow down (but not fast enough), and demand growth (refinery downtime and strikes not helping).
Below is a snapshot of the U.S. storage picture as we sit today. If we continue to build storage at the same rate we’ve built the last three weeks, the U.S. will run out of capacity in 9 weeks, or early May.
Some caveats are necessary, however. One, the capacity listed on this chart is as of 9/30 per EIA.gov. This data gets updated every 6 months, and in the 6 months prior to 9/30, the U.S. added 13 mmbbls of storage, including around 3 mmbbls in Cushing and around 8 mmbbls on the Gulf Coast. So, there is probably some additional storage that has come online since 9/30, which may add a week or two to the countdown. Also, now that pipeline capacity has been built out between storage hubs, any one area of the overall U.S. storage picture (e.g. Cushing) is less important than it once was. Finally, in each of the last 5 years, during the 9 week period we are entering now, there has been at least one week where there was a draw (rather than a build) in oil from storage. So, it’s unlikely that the current pace of storage builds will continue for the next 9 weeks.
Winners & Losers
MMLP took the top spot for the week, as the market continues to gain comfort around MMLP’s distribution, which was oddly in question the last few months (at least based on their 11%+ yield at some point). SXE’s earnings this week struck a positive chord with investors. NGL led all MLPs to the downside, after it piled onto itself with an equity deal at the end of an already bad week of trading.
CNNX made the bottom 5 for the second straight week, as investors continue to vote with their feet after 2015 guidance redefined top tier distribution growth as sub 20%. No repeats among the top 5, as it continues to be difficult to maintain price momentum in this market.
For the year so far, MLPs that at some late last year had their distribution sustainability questions are leading the way to the upside. MMLP wasn’t even in the top 5 last week, but finds itself sitting atop of the sector at this point.
CNNX’s fall the last two weeks put it into the bottom 5 for the year overall. DPM’s fall from investment grade has landed it in the bottom five as well. SXE and CAPL popped out of the bottom 5 this week.
Light news week, but we had a second consecutive week of an MLP doing an equity deal without a clear transaction to use the proceeds for. The offerings help lockup financing for 2015 capex, but doing so now after the selloff the last few months speaks to the bearishness of MLP management teams on the outlook for a sustained rally in MLPs.
M&A / Growth Projects