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December 14, 2014

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Week Thoughts: Bidless Oil Leaves MLPs Wounded

MLPs made it 3 straight weeks of declines this week and has now declined 7 out of 11 trading days since the OPEC meeting.  The MLP Index was down 9.4% this week, and is now negative for the year after peaking at +21.4% YTD total return at the end of August.  Just like last week, MLPs were crushed Monday and rallied Tuesday, but unlike last week, that rally lasted only 1 day, and MLPs were down each day the rest of the week.  The Equal Weight Alerian MLP Index was down 10.7% this week, and is now down 10.2% YTD including distributions.
Weekly MLP Review_12-12
Oil prices declined another 12.2% to fresh lows this week, while natural gas rallied Friday to finish close to flat on the week.  The broader stock market was down 3.3% this week and interest rates were down as well, which helped utilities outperform everything.  The financial media and the whole world is watching oil’s decline, which this week seemed to only hasten its decline.
A few statistics to put the recent MLP crash in historical context:

  • 4% decline was the 6th worst week ever for the MLP Index, with the other 5 weeks consisting of 4 weeks during the financial crisis of 2008/2009, and then the week of 9/11/2001
  • 7% decline so far this month would rank as the 3rd worst month in the history of the MLP Index, behind only 9/08 and 11/08
  • 0% decline so far this quarter (including distributions) would rank as the 3rd worst quarterly decline ever for the MLP Index, behind only 9/30/08 and 12/31/08
  • Monday’s decline of 5.4% was the 13th worst single day decline ever for the MLP Index, and the worst since March 2009

It’s always darkest before the dawn they say, and once the bottom in oil prices is finally reached and MLPs bottom, history says MLPs should have a lengthy recovery.  After the 2 worst quarters in MLP history that ended on 12/31/08, MLPs went on a 5 year run that produced annual returns of 29.5%.
There was more differentiation in MLP trading the last few days, however, which was likely partially due to MLP management teams meeting with investors at the Wells Fargo Conference in New York this week and getting a chance to defend their fee-based cash flows and growth expectations. That differentiation indicates some investors are selectively buying names that have been oversold.
Winners & Losers
None of the top performing MLPs this week are in the Alerian MLP Index.  When you aren’t in the index, you have a better chance of fighting negative sentiment, because there isn’t a wave of ETF and mutual funds selling of your stock as a result of redemptions.  The bottom 5 is dominated by upstream MLPs, as you would expect, but NGL was crushed this week as well.
CELP’s big move this week offset its bottom 5 showing last week.  There were no other repeats in the top or bottom 5, as volatility whips MLP prices around week to week.
The updated YTD returns rankings below just all kind of shifted lower.  Every single name in the chart below was down this week, PSXP maintains a narrow edge on the upside, while NKA and RNO are battling for last place with just 12 more trading days left this year.
News of the (MLP) World
As you would expect with the wild swings in unit prices, there were no follow-on equity offerings this week.  MLPs that were hoping to raise equity in December to fund capital projects in 2015 will need to either borrow to fund capex, issue equity at these much lower levels in January, or find alternative forms of equity.  Maybe we’ll see a few PIPEs.
We’ve now seen a few MLPs issue press releases confirming and defending 2015 expectations. This week it was Targa.  Starting next week as the holidays draw closer, expect radio silence from MLPs and limited projects or acquisitions announced.  Absent company-specific news, MLPs might trade even more with the price of oil during the last few trading days of the year.
One MLP was brave enough to launch an IPO this week: Rice Midstream.  It doesn’t have the same buzz that it probably would have at $90/bbl oil and $4.50/mcf gas, so we’ll see how it trades next Wednesday.

  • Rice Midstream Partners (RMP) launches MLP IPO to raise up to $500mm with a 3.75% yield at the midpoint of the filing range (prospectus)
    • A spinoff of Rice Energy, Inc, publicly-traded Marcellus and Utica producer, RMP provides fee-based gathering services to Rice and third parties
    • Very impressive well results and drilling inventory on just 63,000 acres in the Marcellus are expected to drive top tier distribution growth for several years
  • EQT Corp announces plans to file registration statement for IPO of its GP interests in EQM (press release)
    • GP holding company will own the GP of EQM and 21.3mm L.P. units
    • EQT expects to retain around 80% of the holding company
    • If equity market conditions normalize, don’t expect this to be the only GP IPO in 2015

M&A / Growth Projects

  • CrossAmerica Partners (CAPL) announces $85mm third party acquisition (press release)
    • CAPL to acquire Erickson Oil Products
    • Erickson operates 64 convenience stores in Minnesota, Michigan, Wisconsin and South Dakota, primarily under the Freedom Valu brand
  • Kinder Morgan (KMI) announces long-term transportation and storage agreement with Cheniere (press release)
    • KMI entered into a 15-year agreement with Cheniere to provide 550,000 dekatherms per day of firm natural gas transportation service as well as 3 bcf/d of natural gas storage capacity for use at the Corpus Christi LNG terminal
    • KMI will spend $187mm to expand its pipeline and storage facilities
  • Enterprise Products (EPD) decides not to pursue Bakken to Cushing pipeline
    • EPD had already indicated in a conference call that in a weaker oil environment, this pipeline would probably not be needed, especially when there are two other large pipelines being built already by ETP and EEP


  • Targa Resources Partners (NGLS) reiterated 11-13% distribution growth guidance and distribution coverage above 1.0x (press release)
  • Rentech Nitrogen Partners (RNF) CEO resigns to pursue other opportunities (press release)
  • Alerian announces addition of Enable Midstream (ENBL) to the Alerian MLP Index as part of its normal December rebalancing (press release)
    • EXLP will be removed from the index
    • Alerian made no changes to the Alerian MLP Infrastructure Index
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