June 16, 2013
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The MLP Index was down slightly less than stocks overall this week, but was out of synch with the broader stock market. The Alerian MLP Index was down the first 2 days of the week, then up 3 days in a row to close out the week down 0.7%. MLPs diverged from the S&P 500 after on Wednesday, when the S&P 500 was down 0.8% and MLPs were slightly higher. The S&P 500 bounced back Thursday, while MLPs were again slightly higher, then Friday the S&P 500 dropped 0.6% while MLPs were up 0.5%. The MLP Index is still 4.7% lower than its all-time high on May 22, while the S&P 500 closed the week 2.5% below its all-time high set on May 21.
MLPs appear to be gaining strength relative to the broader market, likely helped by oil price that continues to climb closer to $100/bbl. But that strength may dissipate with a fresh flurry of equity offerings next week. We’ve now seen the 4%+ weekly drop cycle (that I talked about the last few weeks) play out, with a 4% drop 2 weeks ago, then a bounce back week, followed by another weekly drop. The historical pattern breaks down after that,
This Friday, I published a report on the MLP correction. The part that was missing from the report was how that correction looks relative to the broader equity market, not just relative to treasury yields. The MLP Index reached its peak a day after the S&P 500, and hit its recent low on June 5th, the same days as the S&P 500. The MLP correction may just be explained by broader equity sentiment applied to a sector with less liquidity that tends to react more sharply. Click here to read the report, but below is a chart showing the up and down cycles of the MLP Index the last 4 years, including the 11 corrections of 5% or more the MLP Index has had since the beginning of 2010 (click to enlarge).
Winners & Losers
It was a wild week for a few MLPs. Spectra’s big drop down plan jolted SEP’s unit price, which was up 12.9% this week to lead all MLPs. USAC, GLP and EQM had strong bounce back weeks after recent weakness. WPZ had a rough week, after an explosion at its Geismar plant killed 2 people and caused an unknown period of downtime for the Louisiana plant that represents 2.1% of U.S. ethylene capacity. WPZ was down 4.6% this week, but the big loser in the accident (aside from those injured in the accident) was ethane, which dropped 11% this week. A reduction in ethylene capacity means less demand for ethane as a feedstock, at a time when we are already in the midst of an ethane glut.
Other big losers this week were 3 upstream MLPs (LINE, EVEP, LRE), despite continued crude price strength. LINE continues to gather detractors that don’t like its distributable cash flow calculation and accounting for puts. Barron’s highlighted LINE again. I don’t own LINE and don’t cover it on the research side of the house, so I won’t be taking a side, but I will say that the increased headline risk of LINE makes it hard to justify as a position in the conservative separate accounts we managed. The train wreck that is LINE stock lately has been very interesting to watch, however, in particular the twitter war that erupted Friday between the Hedgeye team and Jim Cramer, who wrote on twitter that he has blocked everyone on the Hedgeye team, which as one Hedgeye analyst said is the twitter equivalent of taking his ball and going home. Cramer also called the repeated negative commentary on LINE a “raid” and implied on twitter that the loud negative reports on LINE and ongoing negative twitter commentary by Hedgeye guys was potentially illegal manipulation (see below). Not sure about that, but its good theater.
The 10b-5 clause of the ’34 Act specifically bans fomentation to manipulate stocks. But there might be a $LINE exception..
— Jim Cramer (@jimcramer) June 14, 2013
Another big loser this week, EVEP, is also a Hedgeye short call. EVEP continues to drop from its once lofty price when the Utica excitement first began. There was no news on EVEP and LRE this week and oil was up, so it appears the sell off in those names is a contagion of the LINE issues being applied to other closely followed upstream MLPs.
The 3 MLPs that issued equity this week (VNR – preferred, ARP, and XTEX) did not appear on the loser list this week, which is encouraging for other MLPs that may issue equity in the coming weeks.
Year to date, the same 3 upstream MLPs above are among the bottom five, led by EVEP’s 37.1% decline (including distributions). On this list, the dichotomy between the winners and losers widened this week, as the strong performers got stronger and the weak got weaker.
MLPs are beating stocks handily this year, but as usual are not matching the returns of their parents (GP holdco’s). This relationship is a bit like me playing basketball against my kids. They may make some baskets, but it will be a long time before they can beat me, because of some critical structural advantages I have over them right now.
News of the (MLP) World
Very busy news week, with some nice surprises out of SEP and WES (a previously undisclosed option to JV with EPD on a contracted growth project), and with some not very nice surprises for WPZ and any MLP that was counting on ethane recovering at some point.
NRGY and NRGM will be in the spot light this week when they distribute the 56.4mm NRGM units it owns to its unitholders on Tuesday. The transaction is not dilutive to NRGM and should not impact its operating results in any way, but NRGM may see some selling pressure this week as a result. The transaction is step 1 in the 5 step process to consummate the CMLP GP and LP merger announced in May.
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