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July 5, 2015

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MLP Week Thoughts: Window Un-Dressing

The MLP Index fell an additional 2.4% this week, making it 7 straight negative weeks for the AMZ, during which time the AMZ has fallen 10.8%. Interest rates reverted a bit this week, down 9 basis points, which helped utilities outperform the S&P 500, but it didn’t help MLPs much. Oil prices were down on Greece fears and a weak oil storage report, as far as I can tell. Oil prices and quarter-end window-undressing to be the main drivers of MLP weakness during this short week.
Weekly Review_7-2
7 weeks of declines matches the longest streak the MLP Index has had, with the only other streak occurring from March and April 2012. This week the issues seemed more related to the inverse of what is referred to as window dressing. Fund managers tend to sell losers and buy high flying stocks at the end of the quarter, so they don’t have to explain to constituents why they own the losers. MLPs caught the wrong end of that and were down 2.4% the first 2 days of the week leading up to the end of the month and were flat the rest of the week.
Poll Question Recap
Last week, we asked readers to choose the most likely outcome for WPZ as a result of its parent’s decision to seek strategic alternatives. The majority (55%) of readers believe ETE will acquire WMB and WPZ will join the ETE family of MLPs.  30% of readers believe WMB will go through with its acquisition of WPZ as announced in early May. 15% believe something else happens (WMB or WPZ getting acquired by someone other than ETE).
Poll Question
It has been a rough first half of 2015 for MLPs to say the least (more on that below) with -11.0% total return so far. The question this week tries to gauge sentiment on prospects for the rest of the year.
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Status Update
MLPs finished June down 8.3%, a second consecutive negative month. MLPs also capped their third consecutive negative quarter with a -6.1% return in 2Q. For the year, MLPs have produced total return of -11.0% as of June 30.
Status Update_6-30_2
There have been some dramatic moves on a monthly basis in the MLP space over the years, none more dramatic than during the Fall (with a capital F) of 2008. But, outside of that period, June was the worst month since 2000 for MLPs at -8.3%.
Worst Months
The sliver of hope you can point to coming out of such a bad month is that MLPs have generally rebounded sharply over the next 12 months (especially outside of 2008). Past performance is not indicative of future results, and certainly the MLP market has changed materially over the last 10 years (and last 5 years), but the odds of a rebound are good.
If you broaden the time horizon on the selloff, there have only been 5 years of the last 20 years of AMZ data when the MLP Index finished the first half of the year negative. 2015 registers as the worst of all of them.
Worst First Halfs
Outside of 2008, the second half of a negative year has seen MLPs rebound, so there is some reason for optimism, particularly given how drastic the first half selloff was. What makes this year different is the fund flow headwind that MLPs haven’t had to deal with in the past, as investors exit open-ended MLP products easier than they used to exit individual MLP holdings in prior years.
Winners & Losers
Winners were few and far between. Beaten down MLPs TCP, CAPL and WLKP led the way. On the downside, upstream and commodity sensitive MLPs made up the entire list.
ARP slipped into the bottom 5, and MMLP moved up into the top 5 on a year to date basis. DKL was the only top 5 MLP from last week that didn’t go down this week.
Top5Bottom5_7-2-15_YTD GPs outperformed MLPs last week, but not so much this week. In fact, WMB was the only GP to trade up this week, making it 2 straight weeks at the top. EQGP went from second last week to near the bottom this week, after it fell sharply on light volume to end the week.
News of the (MLP) World
One MLP IPO refused to give up this week. Like the old man playing golf in the thunderstorm in Caddyshack, CNXC pushed forward with its IPO of coal mining assets. The deal was ultimately priced, but only after delaying pricing, reducing price dramatically, and twice reducing the units offered. I don’t think that IPO offers much of a read through to the health of the MLP IPO market for midstream assets, but hopeful MLPs with peripheral assets should take note of how this went down.
Capital Markets

  • CNX Coal Resources (CNXC) priced MLP IPO of 5.0mm units (revised down again, from 8mm and 10mm prior) at $15.00/unit, raising $75mm in gross proceeds (press release)
    • 7% implied yield at IPO
    • CNXC opened trading at $15.00, went as high as $15.61 and closed at $15.41/unit (+2.7%)

M&A / Growth Projects

  • Enterprise Products (EPD) announced additional customer commitment on Aegis Pipeline (press release)
  • Shell Midstream (SHLX) announced drop down acquisition of interest in Poseidon Oil Pipeline for $350mm (press release)
  • VTTI Energy (VTTI) announced acquisition of 6.6% interest in VTTI MLP BV (the Opco) for $75mm (press release)
  • Cheniere Energy Partners (CQP) issued notice to proceed and commenced construction on Train 5 of the Sabine Pass LNG facility (press release)
  • NGL Energy (NGL) announced JV with Meritage Midstream to develop crude oil gathering and water services in the Powder River Basin (press release)
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