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November 10, 2012

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MLP Winners and Losers: The 2%

The Alerian MLP Index was down 2.6% this week on a total return basis, 3% not counting distributions.  It would have been much worse if more than 2% of the index was comprised of coal MLPs.  The S&P 500 was down 2.3%.  It was a “risk off” week, with only the direct dollar and inflation hedge assets posting a positive week, with gold up 3.3% and crude oil bouncing 1.4%.

The MLP Index hasn’t dropped more than 2% in a week since the last week of May.  There have been only 4 weeks of 2% declines for the index so far this year.  Besides this week, the other 3 actually happened in May.  So, we’ve had a pretty nice 5+ months now.  But, as is typical of the MLP season, MLPs don’t perform well in distribution ex-date heavy time periods.  Couple the structural / seasonal weakness around ex-dates with the election and the recent surge in MLP equity issuance (9 MLP IPOs since 8/15), and it probably adds up to a buying opportunity.  If the index drops another 2% next week, and the broader stock market doesn’t, then it might be time to worry.  There was once a time in September and October 2008 when the MLP Index drop 2%+ for 6 straight weeks.  I don’t think that’s likely.
Also, the knee jerk reaction to this election as being universally negative for energy is probably not going to last.  The current regime of Obama and Bernanke will add some support to oil prices, as evidenced by this week, when oil prices were higher post-election.  Printing the dollar into obscurity is going to help oil, assuming it continues to be priced in dollars.  That will keep drilling activity going and help some MLPs.  But no matter how you spin it, coal MLPs will have a hard time the next few months.
As the sector grows into more assets classes, it will be harder and harder to make sweeping generalizations about what’s good or bad for MLPs.  Low interest rates and low cost of debt helps the largest MLPs, but the non-investment grade MLPs won’t benefit as much.  Cheap domestic oil is good for refinery MLPs, but bad for upstream MLPs.  High propane prices is good for gathering and processing MLPs, but probably promotes conservation among retail propane users, hurting the retail propane MLPs (the few that are left).  And in a week when the President who is no friend to the coal sector, coal MLPs will suffer.

Below is a chart that shows the number of weeks in past years that we’ve seen a 2%+ drop.  The highest (no surprise) was 2008, with most of those weeks after Senator John McCain effectively wrapped up his campaign hopes by saying the economy was “doing fine”.  2008’s 19 weeks represents 37% of the year.  Pretty brutal.  Volatility was high last year as well, but the down days were counteracted by plenty of up days once investors seemed to stop giving in to debt ceiling fears.

knee jerk reaction to the election that many investors feel reelected the regime that is anti-energy and pro-taxes,

The MLP Index was down more than 1% Friday even with the S&P 500 and DJIA both slightly higher.  1% declining days are fairly rare as well for MLPs.  Friday’s under-performance I chalk up to seasonal selling exacerbated by equity fatigue and a lack of broader market buyers.  That’s my prognosis. November has historically been the lowest performing month for the MLP Index, losing on average 0.96% in November since 1996, May is second worst on average.

Winners & Losers

As you would expect, coal MLPs dominate our bottom 5.  Upstream names BBEP and LRE were also down sharply despite neither being the upstream MLP that issued equity this week (LGCY), and despite oil prices moving higher week over week.  All 5 of the top five this week weren’t publicly traded at the beginning of last year, and 3 of them weren’t public at the beginning of this year.  I thought that was interesting, that smaller cap, limited track record MLPs outperform the larger cap MLPs in times of downside volatility.

Broadening our lens to the full year to date, its the same story: coal MLPs still not a good bet on the downside, and smaller cap drop down or liquids players dominate the top 5.

Thanks for reading, stay tuned later this weekend for my review of the news and some earnings thoughts…

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