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August 3, 2014

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MLP Week Thoughts: That Escalated Quickly

MLPs declined every day this week, making it 7 straight days of declines for the MLP Index since last Wednesday.  The Alerian MLP Index was down 5.0% (4.2% including distributions) in what was the worst trading week for MLPs in 15 months. 48 of the 50 names in the index were down.  The widespread, nearly universal selloff was concentrated on the large caps, as evidenced by the wide gap between the cap-weighted Alerian MLP Index vs. the Equal Weight version.
The broader stock market and the utility sector sold off hard as well, but not as hard as the MLP sector.  Oil dropping 4.4% and broader energy sector weakness may have contributed to the selling.  As I will discuss below, there is some element of MLP seasonality at play as well, with a number of MLP ex-distribution dates happening this past week.
Weekly Review_8-1-14
Whatever the reason, MLPs were due for a selloff, and it shouldn’t have come as too much of a surprise.  If reasonably strong earnings continue and equity offerings slow their pace, we also shouldn’t be surprised to see MLPs rally in the coming weeks, either.
Year to date, The MLP Index has produced total return of 11.3%, and is well ahead of the S&P 500 on price change, helped by interest rate declines since the beginning of the year.  Light NGL prices have deteriorated along with natural gas prices since the beginning of the year, but fee-based MLPs haven’t seen those prices impact volumes generally (some parts of the value chain and some geographies providing exceptions).  Producers are reporting production beats in the Marcellus, Eagle Ford, Permian and in Colorado.  But natural gas price realizations are coming in light of expectations, suggesting outlets from those areas and access to demand centers remains a rich opportunity set for MLPs.
Boy, That Escalated Quickly
The MLP Index has now gone down for 7 straight trading days.  Losing streaks of 7 days or longer have happened in the MLP space 6 other times by my count, with the longest such streak being 10 days, which happened in early 2010.  See below for a chart that shows how this streak escalated.
Streak Cumulative Return
The streak started out fairly benign, but really got out of hand as the week progressed.

Thursday’s -2.0% decline was the worst day of the year for the Alerian MLP Index.  Before Thursday, the MLP Index hadn’t even had a single day of more than 1.5% decline, and in fact had seen only 6 days with more than 1% decline in the Alerian MLP Index (including Wednesday’s 1.1% drop), much lower than we’ve seen in recent years.  In fact, the most such days occurred during 2009, which also had the highest return.
Big Down Days
This week’s 4.2% total return performance was the worst for the MLP Index since May of 2013 when the index dropped 4.3% in a week.  The last time we got a weekly selloff like this in mid-summer it was the first week of August 2011, when the MLP Index declined 5.5%.  The MLP Index bounced back with a 3.6% gain the next week.  In fact, the last 10 times the Index has been down 4% or more in a week, 9 times the index has traded up the next week, and each of those times the index was up more than 1%.
Thursday’s 2.0% decline also set a new record for the worst July ever for the Alerian MLP Index (out of 18 other July’s since 1996) at -3.6%.  The previous worst July was 2011, when the index was down 1.9%.  July was once a consistently positive month, posting gains in each of the first 11 years of the Alerian MLP Index historical data from 1996 through 2005.  Since then, July has been negative for 5 of the last 8 years.
Out of 223 months, this July was the 25th worst month for the index.  In 15 of those 24 months, the Index traded up the next month.  3 of those when it didn’t were in the second half of 2008, which I think was a much different environment than today.
Worst July
In recent years, August hasn’t been kind to MLP investors either, posting negative returns in 5 of the last 7 years, including a 2.5% decline last August.
Winners & Losers
Way more losers than winners this week.  Only 9 MLPs were positive, out of 91 non-variable pay MLPs.  That doesn’t include the 3 MLP IPOs this week, all of which traded up (WLKP +21.9%, RIGP +10.0%, VTTI +5.2% for the week).  Only one MLP in the top five is in the Alerian MLP Index (ARLP).  It is also worth noting that only 2 of the MLPs in the bottom five are in the MLP Index (EQM and LGCY), which I think highlight how lighter volume can magnify trading performance in either direction.
PBFX, LGCY and EROC reported 2Q results this week, contributing to their outsized declines.  In what seems to be a quarterly event, ARLP’s results were the biggest surprise beat in the MLP sector, reminding the market that at least one coal producer isn’t dying a slow death in the face of regulatory headwinds and huge natural gas production growth.  BKEP and HEP did not report earnings or anything else this week, while AMID announced an acquisition.
MLP Top5_8-1-14
MLP Top5_8-1-14_Chart
HCLP’s reign as the top performing MLP of 2014 lasted just one week.  PSXP is back in the lead, followed by GLOP, which also leapfrogged HCLP.  TEP replaces EQM in the top 5.  CMLP and USAC replaced LGP and EXLP in the bottom 5.
MLP Top5_8-1-14_YTD
MLP Top5_8-1-14_YTD_Chart
News of the (MLP) World
3 IPOs on 3 consecutive days is a first in the MLP sector.  Back in January 2013, we had 3 MLPs in 4 days when USAC, CVRR and SXCP went public.  12 times we’ve had 2 MLPs in either 1 or 2 days.  Also, there was one instance of 4 MLPs in the span of 7 calendar days (December 2011).  IPOs continue to work well on average, with heavy institutional participation and after-market buying.  Given the losing stream MLPs are on, I would not be surprised if the MLP IPO market will shut down for the remainder of August, setting up for an active Fall equity calendar.

  • Westlake Chemical Partners (WLKP) prices IPO of 11.25mm units at $24.00/unit, raising $270mm in gross proceeds ($310.5mm with overallotment option) (prospectus)
    • 4.6% implied IPO yield, priced $3/unit above the range
    • Opened initial trading at $30.28, and closed at $30.78, up 28.3% its first day
  • Transocean Partners (RIGP) prices IPO of 17.5mm units at $22.00/unit, raising $385mm in gross proceeds ($442.8mm with overallotment option) (prospectus)
    • 6.6% implied IPO yield, priced $1/unit above the range
    • Opened initial trading at $22.00, closed at $24.30, up 10.5% its first day
  • VTTI Energy Partners (VTTI) prices IPO of 17.5mm units at $21.00/unit, raising $367.5mm in gross proceeds (prospectus)
    • 5.0% implied IPO yield, priced at high end of the filing range
    • Opened initial trading at $21.00, traded as high as $23.42 before closing at $22.10, up 5.2%

M&A / Growth

  • ONEOK Partners (OKS) plans to invest $605mm to $785mm for new natural gas processing facility and related infrastructure in the Bakken (press release)
    • New 200 mmcf/d plant to be in-service by end of 2016
    • Compression and 12-mile NGL line to connect the facility into OKS’s existing Bakken NGL line
    • OKS has now announced $7.0bn worth of projects through 2016, and has an additional $3-4bn of unannounced growth projects
  • Enterprise Products (EPD) announces additional agreement for ethane export terminal (press release)
    • EPD now has long-term commitments for 85% of the terminal’s planned capacity
    • EPD’s previously announced ethane export terminal is slated to be complete in 3Q 2016
    • EPD provided little detail on who the customers are for the terminal and where the those customers will be taking the ethane, either in the press release or on the 2Q earnings conference call this week
  • ArcLight Capital forms JV to construct crude oil infrastructure in the Eagle Ford shale, 50% of which will be sold to American Midstream (AMID) upon completion (press release)
    • Republic Midstream, a newly-formed portfolio company of ArcLight Capital, announced agreements to construct and operate a crude oil gathering system, a central delivery terminal complex and an intermediate takeaway pipeline to serve Penn Virginia’s Eagle Ford production
    • ArcLight to invest $400mm in the project, and will offer 50% to each of AMID and JP Energy Partners when complete
  • Williams Partners (WPZ) announces $150mm Transco expansion (press release)
    • WPZ to add additional compression to provide additional natural gas transportation into New Jersey
    • Project expected to be in-service in phases in 2016 and 2017
  • Buckeye Partners (BPL) announces sale of Lodi Gas Storage, LLC to Brookfield Infrastructure for $105mm (press release)
    • BPL acquired the California storage facility for $432mm from ArcLight Capital in January 2008
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