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October 29, 2011

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MLP Week Thoughts: Up Jumps the Market

Great week to be in anything but cash.  Its been a trick or treat market this year, but this week (and this month) was a treat for long investors.  Positive U.S. GDP number seemed to be the biggest driver of the rally, but the Euro plan and several other positive data points from U.S. and China also helped.  Risk was on this week, particularly on Thursday, when the S&P 500 was up 3.4%.  Everything was up this week: S&P 500 up 3.8%, oil futures up 6.7%, natural gas up 8%, gold up 6.4%.  MLPs trailed everything, gaining only 2.6% this week.  No complaints here, particularly after last week’s outperformance, and given that MLPs are still outperforming for the year to date.  I’m thinking for Halloween

Through Friday, MLPs were up 10.1% for the month.  Since 1996 when the Alerian MLP Index data starts, there have only been 3 months when the index gained more than 10%.  Two of those happened in 2009, the other was December 2000.   The index has only been negative more than 10% for a month twice, September and November of 2008.  Al four occurrences are in the below chart, alongside the S&P 500 performance during the same month.  Even with MLPs very close to a historic month, the S&P 500 is having its 9th best month of all time, up 13.6% so far.
In the chart below you can see what the S&P500 did in previous 10%+ MLP quarters.  The months that immediately followed the big months are mixed as well, but the 2 most recent occurrences saw large declines the following month.  Historically, the month of November is the second worst month for MLPs, with median returns of -0.29% since 1996, so we’ll see.

It’s been a real mixed bag when comparing stocks (S&P500) to MLPs, with stocks flat in December 2000, stocks down sharply in January 2009, and stocks up but not as big as MLPs in July 2009.  This month will mark the first time that the stock market is outperforming MLPs during a 10%+ MLP month.  Seeing that makes this month’s performance seem more like the reaction of a defensive sector to a “risk on” month, with MLPs along for the ride.  On the other hand, compared to the S&P 500 since late April, MLPs have outperformed consistently, and so there wasn’t as much to gain back in a snapback rally.
Earnings Notes
Bellweather E&P MLP Linn Energy ($LINE) reported lower than expected results this week (earnings release).  Higher lease operating expenses related to bottlenecks in the granite wash and higher than expected maintenance capital expenditures drove the miss.  Coverage was down to 1.1x on the quarter.  Longer term growth story still intact, however, and many are expecting LINE to be a player in some of the asset packages currently on the market.
Analyst favorite and perpetually fully value MLP Sunoco Logistics ($SXL) announced results (earnings release) that crushed analysts’ expectations, by 20%+ in some cases.  The company raised distributions, and had 2.0x distribution coverage in the quarter.   Management also raised distribution guidance to 7% for 2012, and announced a 3-1 unit split.  SXL always seems to outperform expectations and it keeps going up year after year.  I’ve never owned it, because it always seems overvalued to me relative to other options, but clearly the premium was warranted before this quarter.
Winners / Losers
In reviewing the winners and losers for the week, $CQP tops this list of winners with 17% gain, buoyed by the announced deal with BG to export LNG (read my post on the deal here).  Global Partners ($GLP) makes the top 5 for the second straight week.  3 other small cap MLPs round out the top five, including ARLP and GMLP, both of which raised their distributions by 3.5%+ quarter over quarter.

In terms of the biggest losers, XTEX announced a flat distribution last Friday, which surprised some people who were looking for growth. TCLP release poor quarterly results.  EPB saw heavy selling on its ex-date, which has to be a result of people who were not happy with the KMI deal that decided to hold on to get one final distribution from EPB before selling their shares.
Many distribution announcements this week.  So far this quarter  59 MLPs I follow have announced their distributions, and 32 (54%) have announced increases.  Average quarter over quarter distribution change is +1.6%.  This week’s announcements:

  • CPLP, MMLP, NRGY, ETP, ETE, and EEP held distribution flat
  • APL raised distribution 14.9%
  • ATLS raised distribution 9.1%
  • EROC raised distribution 6.7%
  • AHGP raised distribution 4.7%
  • GMLP raised distribution 3.9%
  • ARLP raised distribution 3.5%
  • CHKM raised distribution 3.4%
  • BBEP raised distribution 3.0%
  • SXL raised distribution 2.1%, announces 3-1 unit split, and 7% distribution guidance
  • PVR raised distribution 2.0%
  • OKS raised distribution 1.7%
  • HEP raised distribution 1.2%
  • DPM raised distribution 1.2%
  • SEP raised distribution 1.1%
  • EXLP raised distribution 1.0%
  • EVEP raised distribution 0.1%

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.  No position in LINE or SXL.

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