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March 31, 2013

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Week Thoughts: All Flinch No Paddle as MLPs Reach New Heights

MLPs were up big again this week (Alerian MLP Index up 1.8%), this time the S&P 500 was up as well, joining the MLP Index in “all-time high” country. Oil, natural gas, propane and ethane were all up sharply this week, the quad-fecta.  Interest rates dropped slightly. MLPs were up 3 out of 4 days, with the bulk of the move this week happening on Thursday, which also happened to be the last day of the quarter.  And what a quarter it was…
It was the best quarter ever recorded for the Alerian MLP Index (+19.7% total return), narrowly beating 2Q 2009’s previous record of 19.3%.  Back in 2Q 2009, 86% of the return came from price appreciation as opposed to distributions vs. 91% this quarter, which makes sense given that distribution yields were much higher in 2009.  In 2009, MLPs had virtually no distribution growth, and most of the returns came from price appreciation, as yield on the MLP Index dropped from 10.9% to 9.2% quarter over quarter.  This quarter, the yield on the MLP Index went from 6.57% to 5.67%, and the implied MLP Index distribution grew 1.6% quarter over quarter.  MLPs were up 11.9% in January, flat in February and up 5.27% in March with approximately 150 basis points of 1Q returns resulting from distributions.   March’s 5.3% return was good for 2nd best March on record, surpassed only by March 2002 (+7.3%).  More on the quarter in a wrap up post that should come out at some point past midnight Sunday night / Monday morning…

Weekly Review_3-28-13

When I have talked about MLP the MLP Index making all-time highs on a price and total return basis, I’ve been quick to point out that we are not seeing all time low yield for the index yet.  The all-time low yield is 5.37%, set back in July 2007.  We are now less than 30 basis points away from that, and with another month of MLPs potentially being bid up before distribution ex-dates happen, we could soon see a fresh all time low yield.  Should that happen, I likely would start to raise cash in my client accounts in earnest, which I have yet to do, even though the tone of my posts of late has been cautious.

Speaking of my bearish tone of late: the last 4-6 weeks, I have been airing my concerns over fresh all time highs.  Having spent the majority of my professional investing career during the last 4 years, its easy to figure out why I would be bearish after a 25% total return for the MLP Index in 4.5 months since 11/15/12.  The last 4 years, the trend has been up for MLPs and stocks, but each sharp rally was followed by renewed fears and a correction.  Sort of a whack-a-mole market, and if I’m the mole, I guess I’ve been flinching for a month or so waiting for the whack that hasn’t come yet.  
And yet, my cautious tone hasn’t manifested itself in the accounts I manage that were fully invested heading into this rally.  I haven’t lightened up my long exposure in any of our portfolios (although I did sell some calls last week).  I haven’t raised cash in separate accounts and haven’t shifted closer to neutral in our fund.  But this week, I probably will.  And if the reverse jinx continues for another week or even 6 more weeks until distributions get paid, that’s fine.  At this point, I’m going to maintain my bearish short-term stance even thought all signs point to a continued rise.  Its almost superstitious at this point.  The reverse jinx seems to be working, so why change my tone now?
Winners & Losers
SXE was the story of the week, after it posted very weak earnings on Thursday.  SXE was down more 20.5% for the week.  CLMT had an equity offering, which is behind its 4.5% decline this week.  STON and FGP, which typically exhibit low correlation to the rest of the MLPs, were also down.  LINE finally got into the top five to finish a tumultuous quarter on a positive note, buoyed by higher oil and natural gas prices.  Notable this week was that the biggest positive move was just 6% (all of the top 5 last week were up more than 6% last week), indicating broad participation in the rally, with not high side outliers.


For the year, DKL was the only new addition to the top 5, displacing GEL from last week.  Each of the top 5 MLPs this year are up more than 35%.  In total 16 MLPs have produced total returns of 30% or more YTD, which is amazing to me.  For the year, the aforementioned SXE joined the bottom 5, bumping LRE off the loser list.
MLPs are dominating this year to date vs other investments, on pace to start a new S&P 500-beating streak in 2013. GPs have outperformed, while last year’s big winners, the group of variable distribution MLPs, has lagged as a result of weakness in fertilizer companies in general lately. Oil and natural gas have been cooperating quite well for us MLP investors.  Natural gas above $4.o0 is a welcome sight for many MLPs.


News of the (MLP) World


All of a sudden the pending IPO list has heated up.  We went from pending MLP IPOs (all with stale registration statements) to 3 fresh MLP IPO candidates, after 3 MLP IPO’s filed their respective S-1s this week.  Below is an update of the IPO pipeline.  At some point it probably makes sense to remove those that haven’t filed an updated S-1 in more than 8 months, maybe once they’ve been stale for a year.  So far in 2013, we’ve seen 4 MLP IPOs, including; USA Compression, CVR Refining, SunCoke Energy, and New Source Energy.
Pending MLP IPOs
There were also 2 MLP equity offerings this week.  ACMP performed well in the aftermarket, as have several of the recent equity offerings, which bodes well for future equity offerings (and for brokers selling those deals).  If follow-ons get in the habit of trading up after pricing, then the deals get easier to place, which opens up the equity markets to bigger and more frequent equity offerings.  Below is a summary of the last 10 overnight equity offerings, and their short term aftermarket performance.

Last 10 Equity Offerings

Equity Transactions this Week

  • Tallgrass Energy Partners, LP (TEP) files S-1 to raise up to $315mm in MLP IPO (initial registration statement filed confidentially under JOBS Act)
    • MLP that owns a midstream portfolio acquired for $3.3bn from KMP in November 2012
    • Assets initially contributed include the TIGT System, a FERC-regulated natural gas transportation and storage system with approximately 4,645 miles of transportation pipeline and natural gas storage facilities in the Rockies area
    • Tallgrass CEO Dave Dehaemers has extensive MLP experience at (NRGY and KMP) and Bill Moler (COO) also worked at NRGY
    • Standard IDR structure
  • Phillips 66 Partners LP (PSXP) files initial S-1 to raise up to $345mm in MLP IPO
    • Another big brand name refined products drop down MLP, in the tradition of MPLX and TLLP
    • Standard IDR structure
  • Access Midstream (ACMP) prices public offering of 9.0mm common units at $39.86/unit, raising $358.7mm in gross proceeds
    • ACMP to receive gross proceeds of $358.7mm, net of which will be used for general partnership purposes
    • Overnight offering, priced at 3.3% discount to prior close
    • ACMP units traded flat from offer price in the session after pricing
  • Calumet Specialty Products (CLMT) prices public offering of 5.25mm common units at $37.50/unit, raising $196.9mm in gross proceeds
    • CLMT to receive $196.9mm in gross proceeds, net of which will be used to reduce borrowings
    • Overnight offering, priced at 4.0% discount to prior close
    • CLMT units traded down 0.5% from offer price in the session following pricing
  • Emerge Energy Services LP (EMES) files S-1 to raise up to $100mm in MLP IPO (initial registration statement filed confidentially under JOBS Act)
    • Oilfield services MLP with frac sand operations and fuel processing / distribution segment
    • Backed by Insight Equity, a smaller PE investment firm
    • CFO is long-time MLP investment banker Robert Lane and Kayne Anderson’s Kevin McCarthy will serve as an independent director
    • No IDRs


  • No transactions this week.

M&A / Growth Projects

  • No significant transactions this week.

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