MLPs showed resilience in the face of sharply lower commodity prices across the board this week, declining slightly despite oil prices dropping below $50/bbl again. That resilience was at least partially the reversal of last week’s MLP underperformance vs. strong commodity prices.
Again and again throughout the week (e.g. Monday, Wednesday and Friday), MLPs dropped early with oil prices, then rallied late even as oil languished to close nearly flat. The equal weight Alerian MLP Index was very close to flat for the week overall. This is encouraging action on the margin for MLPs, although the midstream corporations fared much worse.
Distribution announcements, solid fundamental results from KMI may have engendered some hope ahead of MLP earnings season, where the biggest theme could again be the ongoing (not perpetual, hopefully) bottoming of volumes.
Impatient Capital, L.P.
I had a fun time over the weekend trying to explain to my kids the concept of a retail storefront that would rent you a physical copy of a popular film, and how you would need to return it (preferably on time and after rewinding). I explained how at first, I rented Betamax and eventually VHS movies from the rental section of the Randall’s grocery store at Voss and Woodway (now a Whole Foods).
A few years later, it was VHS and laserdiscs from the Hollywood Video at Woodway and Chimney Rock (now a paint store). Then it was DVDs from Blockbuster on that same block (now an eye doctor’s office). Then it was DirectTV, Netflix DVDs by mail, and eventually streaming movies via Netflix, Amazon and iTunes.
As a result of constant disruption by new technology, my kids are growing up in an on-demand, subscription-based, instant world. They barely know what it feels like to be thirsty.
Society has always wanted things now. As noted philosophers Freddie Mercury and Veruca Salt each said decades ago: “I want it now!”…The difference today is we usually can and do get what we want almost immediately.
With Kinder Morgan, though, we can’t have the old, much higher dividend right now. High leverage doesn’t solve itself overnight, even with a big payout reduction (see BWP). This week, KMI’s lack of substantial update with its earnings release on the financing plan for the Trans Mountain expansion seems to have shaken confidence in KMI’s ability to right its balance sheet in the face of fragile commodity price environment. KMI finished the week as the worst performing midstream corporation (-5.2%).
KMI is a big company and the TMX expansion is a big project, it seems reasonable that a process to find the right partner will take time. However, the incremental investor making a buy/sell decision today doesn’t seem to be the patient capital that used to dominate the midstream sector. The pressure is on to produce big results fast, even if that’s just not possible in most cases (especially when a politically charged pipeline project is at stake).
So, here I am for a second straight week preaching patience. Expect management teams to do the same over the next few weeks, and then we can all go back to holding our breath until the next OPEC meeting.
Winners & Losers
General Partners & Midstream Corporations
News of the (MLP) World
I was a bit surprised the Antero GP IPO didn’t launch this week, but it should be kicking off soon. As a result, MLP capital markets were quiet again this week. One big strategic catalyst came through (WPZ Geismer sale), but the big announcement on KMI’s Trans Mountain financing plan remains pending. In small-cap MLP news, MLP buyouts are continuing to be held up by tough negotiations from special committees. This is a positive MLP corporate governance trend that should be applauded, but it is also slowing some much needed rationalization of zombie MLPs.
Growth Projects / M&A
Tis the season again for MLP distribution announcements. This week 26 MLPs and corporations announced distributions. No distribution cuts this quarter.