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December 20, 2011

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Snowless in Boston: Impact on MLPs

In stark contrast to last winter, which resulted in 6-ft high snow banks on either side of my driveway by the end of February and cabin fever rivaling that of “The Shining”, the Boston area has yet to have any snowfall in November or December this year.   If you live in some other part of the country, you may have missed this, but the weather nationwide (and specifically in New England) has been very mild compared with last year.  At the risk of jinxing what has been a very pleasant few months with no snow shoveling or ice scraping, lets try to quantify just how mild it has been and what that means for MLPs.

(heeeeere’s Johnny!)

According to heating degree days data I sifted through on the website of the National Weather Service (data found here), so far, the 2011 winter (loosely defined by me as starting at the beginning of November) has been the mildest on record since 2006.  Heating degree day (HDD) is a measurement designed to reflect the demand for energy needed to heat a home or business. It is derived from measurements of outside air temperature.
There have been 894 heating degree days nationally from the beginning of this year November through December 16, 10.5% less than the average of the previous 5 years over the same time period (999 HDDs), and 15.8% less than last year when there were 1062 HDDs.

The difference is even more pronounced in Massachusetts, where there have been 1035 HDDs thus far, 20.5% less than the 1302 HDD average the prior 5 years, and 23.1% less than the 1346 HDDs last year.  The West and Rocky Mountain regions of the country are colder than normal, but New England is far warmer than normal.  Just last week, according to the EIA, New England averaged 43.0 degrees, 8.1 degrees warmer than normal.

A milder winter means less demand for and consumption of heating oil, propane, natural gas and electricity.  That will likely mean further deterioration of operating results from the propane MLPs, at least in this current quarter.  It can mean lower demand on the margin for coal from utilities.  It can also be one more headwind facing natural gas prices.
Last year was a very cold winter, which helped reduce excess natural gas storage a bit and helped to keep natural gas prices from falling below $4.00 for most of 2010 and early 2011.  But without any help from weather and with ever-increasing production from liquids-rich gas plays (gross production up 6.9% year over year), natural gas storage levels ballooned.   Working natural gas in storage, according to the EIA’s weekly report, is currently 3,729 bcf, 4.3% above last year, and 10.3% higher than 5 year average level of 3,382.

This combination of increased supply and decreased demand has sent natural gas prices way down.  Spot Henry Hub Prices broke $3.00 in late November and are hovering around $3.15 per mmbtu currently, compared with a 5 year average price of $5.66 per mmbtu and a 2010 average price of $4.37 per mmbtu.
So, when thinking about which MLPs will be the winners in 2012, proceed with caution when considering placing bets on some of the MLPs that lagged in 2011 (like natural gas storage MLPs and propane MLPs).  For those MLPs to revert to the mean and trade more in-line with other MLPs again, they will have to overcome substantial fundamental headwinds.
Names like SPH and NRGY with significant concentrations of assets in the Northeast should have weak results this quarter.  In years past, this sort of weather would have been fairly catastrophic for GLP, which only has assets in New England and began its MLP life as predominantly a heating oil wholesaler.  However, over the last few years, GLP has diversified its operations, not geographically, but away from heating oil and into transportation fuels.  On the margin, I would bet that gasoline demand and convenience store sales are counter cyclical to heating oil demand, but this current quarter will either confirm or refute that hypothesis.
The only game-changer in all of this would be drastically increased domestic economic activity, which seems unlikely.  I am certainly not ruling out a slightly improving economic outlook for 2012, but nothing that would stimulate massive energy consumption increases.  For 2012, the winners will likely be those with operations tied more closely to the growth in supply of higher margin crude and NGL production.  More on 2012 trends and expectations in future posts.
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.  Long GLP.

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