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January 4, 2015

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Review of MLPs in 2014: Under Pressure

MLPs limped to the finish line of 2014.  The Alerian MLP Index (AMZ) closed out the year with a third straight negative month and the worst month (-5.6%) since May 2012 (-7.5%).  AMZ finished down 12.3% for the fourth quarter, its worst quarter since 4Q08 and the third worst quarter ever recorded by AMZ.  MLPs rebounded a bit in the last 2 weeks of the year, averting what could have been a much worse month.  That late burst gave AMZ a positive total return for 2014 overall, but a much lower return than the S&P 500 or utilities in 2014.
All the talk in 2013 was about interest rates, despite the MLP Index producing 27.6% total return in a year that saw the interest rate on the 10yr treasury rise by 127 basis points.  This past year, interest rates fell 86 basis points, and MLPs had a much worse year.  It would appear any correlation to interest rates has been more recently overwhelmed by a correlation to commodity prices, which were the catalyst for the selloff in MLPs since the end of August.  Below is a summary of the changes from the end of 2013 to the end of 2014.
2014 Review
Last year, oil and natural gas prices were up solidly, interest rates rose 127 basis points, the S&P 500 was up nearly 30% and MLPs were up nearly 28%.  Each one of those items reversed course in 2014, with the exception of the S&P 500.  Investors can hope for a rebound in commodity prices, fund flows into MLPs, and M&A activity to lift MLP spirits and stock prices in 2015.
2014 By the Numbers

  • MLP IPOs: 18, no GP IPOs
  • Equity Issuance In Marketed Equity Offerings (including IPOs): $26.5bn (not counting ATMs)
  • Debt Issuance: $35.0bn
  • Total Announced M&A Value: $100bn+

Below is a recap of where the Alerian MLP Index returns stand relative to recent time periods:

  • December: -5.6%, fourth straight negative month, longest streak since 1999
    • November: -2.6%
    • October: -4.6%
    • September: -1.6%%
    • August: +8.2%
  • 4Q 2014: -12.3%, worst quarter since 4Q 2008, third worst quarter in recorded MLP history
    • 3Q 2014: +2.7%
    • 2Q 2014: +14.2%
    • 1Q 2014: +1.9%
    • 4Q 2012: 5.3%
  • 2014: +4.8%, six straight positive years, longest streak in recorded MLP history
    • 2013: +27.6%
    • 2012: +4.8%
    • 2011: +13.9%
    • 2010: +35.9%
    • 2009: +76.4%

Review of 2014 Proposition Lines
At the beginning of last year, I published the third annual post (read it here) where I set pretend gambling lines for certain MLP events and made my guess as to whether the actual event would be above or below that line.  Below is my review of those guesses compared with the actual results of these MLP “prop bets” (proposition bets, like you see for major championship sporting events).
1. MLP Returns vs. S&P 500

  • Line: pick ‘em
  • My Pick: Over
  • Actual Result: Under by almost 900 basis points (Alerian MLP Index: +4.8%, S&P 500: +13.7%)

2014 marked an unprecedented three years in a row of MLPs losing to the S&P 500, after a string of more than a decade of MLPs outperforming the stock market.  Outside of this losing streak, MLPs have never underperformed for more than one year in a row.  This year’s underperformance was impacted by the energy-specific commodity price declines.

  • Line: 12
  • My pick: under
  • Actual 2014 Results: 18

This was by far the biggest miss of the last two years.  I continue to underestimate the ingenuity of MLP bankers and the market’s capacity to absorb MLP IPOs.  It feels like the IPO boom may have peaked in 2014.  I think we might see half as many MLP IPOs in 2015, but we might see more GP IPOs than we’ve seen in the last 4 years combined (3).
3. Variable Distribution MLP IPOs

  • Line: 3
  • My pick: under
  • Actual 2014 Result: 1

I was expecting 1-2 variable distribution MLP IPOs in 2014 after 3 in each of 2012 and 2013.  We got just one royalty upstream play called Viper Energy (VNOM).  Another very similar IPO to VNOM is on file, so expect at least one variable distribution MLP IPO, but don’t expect many others.  With the success of Westlake Chemical in structuring a variable business into a stable one, I expect to see other businesses that might have gone variable pay go the traditional MLP structure going forward.
4. GP Holding Company IPOs

  • Line: 1
  • My pick: push
  • Actual 2014 Result: 0

I was expecting 1 GP IPO in 2014 but didn’t get any.  I think I was just early on this call, and with the announcement from EQT Corp that it would be taking its GP stake in EQM public, we should have at least one GP IPO In 2015.
5. MLP Consolidations / GP Sales

  • Line: 4
  • My pick: over
  • Actual 2014 Result: 11

After the very active 2013 for consolidations at 9, we got a larger number of transactions and a much larger dollar amount the KMI/KMP/KMR/EPB merger.  Expect the torrid pace of these transactions to continue in 2015, with the added catalyst of challenging commodity price environment to spur things along.
2014 Mergers or buyouts:

  • EPD announced acquisition of remaining OILT units
  • NGLS announced acquisition of APL
  • KMI bought KMP, EPB and KMR
  • BBEP acquired QRE
  • Flint Hills acquired PDH

2014 GP Transactions:

  • ETP bought SUSS, GP of SUSP (now SUN)
  • CST bought GP of LGP (now CAPL)
  • EPD bought GP of OILT
  • WMB bought remainder of GP of ACMP
  • TRGP announced acquisition of ATLS
  • NGL acquired GP of TLP
  • TLLP acquired GP of QEPM
  • OXF’s GP bought by Westmoreland

6. MLP Distribution Cuts

  • Line: 1.5
  • My pick: over
  • Actual 2014 result: 4

BWP, NRP, EROC and RNO all cut distributions in 2014.  One day into 2015 and we have had two distribution cuts already (LINE and BBEP).  Given the number of MLPs that exist now compared with even last year and the commodity price selloff, 2015 could see a repeat of 2014.
7. MLP Tax Law Changes

  • Line: none
  • My pick: none
  • Actual 2014 result: none

Nothing meaningful on the tax front got passed this year, and there are no negative tax changes on the horizon, for now.  The IRS did pause private letter ruling (PLR) issuance and has yet to announce clarification on the PLR process going forward.
8. Equity Issuance in Marketed Offerings

  • Line: $27.5bn
  • My pick: under
  • Actual 2014 result: $30bn

Along with my call on a less robust 2014 IPO market, new MLP equity exceeded my expectations.   IPOs traded very well on average in 2014, while follow-on offerings struggled in the aftermarket.
9. MLPs Launching At-The-Market Equity Distribution Programs

  • Line: 12.5
  • My pick: Over
  • Actual 2014 Result: 8 (does not include ATM renewals, truly new ATM programs only)

ATM’s have become the preferred mechanism for MLPs to use to fund ongoing growth capital needs.  I expect all MLPs to eventually put ATM programs in place, but I expected fewer new ATM programs in 2014, and that’s what we got when compared with the 17 from 2013.
10. Top Performing Subsector

  • My Pick: Gathering & Processing MLPs
  • Actual Winner: Natural Gas Pipeline MLPs

Gathering & processing MLPs were caught up in the selloff of commodity prices and ended 2014 as the third worst performing subsector, ahead of marine transportation MLPs and upstream MLPs.  Natural gas pipeline MLPs were led by TEP, TCP and EQM, but also helped by EPB’s performance on its buyout.  The only negative natural gas pipeline MLP was BWP.
Top 10 Winners & Losers of 2014
Not owning upstream MLPs and owning high growth or drop down MLPs was the winning formula for 2014.  Dominion Midstream’s IPO from October has defied the recent gravity of the MLP space, going straight up, while the sector has declined in each of the three months since DM priced its IPO.  DM beat all other MLPs in 2014 and fellow October IPO SHLX made the top 10 as well.
Happy New Year, good luck in 2015.

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