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January 4, 2013

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One Last Look at 2012 for MLPs

MLPs disappointed in 2012, but its a testament to just how great MLPs have been over the years when a positive 4.8% total return for the sector, with solid distribution growth, is a disappointment.  MLPs didn’t finish well either, with total returns in the fourth quarter of -3.4% for the MLP Index and back to back negative months to finish the year.  MLPs and the rest of the market have been shot out of a cannon so far this year, see today’s other post for more on that awesome analogy.  So maybe after a year of consolidation, MLPs are ready to breakout again in 2013, we’ll see.
The big positive trends in 2012 were the performance of variable distribution MLPs, this year’s MLP IPO class, and MLP GP Holding companies.   On the M&A front, the upstream sector was very active in 2012, and I expect that to continue through 2013.  The variable distribution model in 2012 proved itself to work exceptionally well in an upcycle for the assets owned by those variable MLPs.  I expect the downside volatility will be high in the opposite scenario, but we’ll have to wait and see whenever fertilizer and refining margins revert.  The GP holding company trend is many years in teh making and seems sustainable given the scarcity value and the persistent undervaluing of IDR math, as discussed earlier this year here.
The big negative stories were coal MLPs, propane MLPs, dry gas focused gathering & processing MLPs, and NGL prices.  Two coal MLPs cut their distributions in 2012, and all 4 had total returns worse than -15% for the year (PVR, which is no longer majority coal operations, produced total return of 10.1%).  All 4 propane MLPs had negative 2012’s due to the warm winter and cheap heating alternatives that lowered retail propane volumes across the board.  Low natural gas prices hurt some gathering & processing MLPs that have operations focused in areas where E&P companies were laying down rigs.  The breakdown of the 10 biggest winners and losers for the fourth quarter and for the year are listed below.  These two lists exclude variable MLPs and GPs, which I break out further below.
4Q Top10
2012 Top 10
Variable Distribution MLPs
Variable MLPs 2012
MLP GP Holding Companies
GPs 2012
Fewer One Night Stands
Equity capital markets digested a record amount of equity, but suffered a bit of indigestion late in the year.   MLP equity deals were increasingly difficult to get done as the year went on.  The solution for many MLPs was to extend the marketing period for their offerings from overnight deals to a one day marketing period.  The result was a total of 14 marketed follow on offerings in 2012, including 11 after August 1st.  The 14 total was the most we’ve seen in at least 5 years, but it wasn’t the largest percentage of deals.  Back in 2008, when markets were essentially closed the second half of the year, 55% of the MLP equity deals were marketed deals.  The trend in the structure is important, because if there is an overwhelming appetite for MLP paper, MLPs will do more overnight deals, because that type of deal is quicker, cleaner and can be done at less than 4% discount.
MLP Equity Offering Breakdown
MLP Equity Breakdown Percentage

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