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November 26, 2011

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MLP Week Thoughts: Euro Trashed Again

MLPs had their worst Thanksgiving week ever, and it felt like a win.  That’s because the S&P 500, dragged down by the European mess, also had its worst week ever, and the MLP worst was better than the market’s worst.  Its kind of like when University of Texas and Texas A&M played on Thanksgiving this year, with both teams having disappointing years.  UT’s worst was better than Texas A&M’s this year, but it was ugly to watch.  Another football analogy would be watching the Indianapolis Colts (0-10 so far this season) when they play another terrible team in Carolina (2-8) this Sunday.  No matter who wins, its pretty much the worst the NFL has to offer.
For the week, MLPs were down 2.3%, compared with -4.7% for the S&P 500 and -2.5% for gold.  US treasuries were one of the few positive asset classes, sending yields below 2% again.

Last week, MLPs traded almost in the opposite direction of the market, this week MLPs tracked the market, just with smaller downward movements, as shown in the chart below.

To illustrate the recent relative strength of MLPs, consider the last time the S&P 500 closed below 1160 was October 7th.  On that day, the MLP Index was trading at 339.25.  So, since October 7th, the S&P 500 has gone up 0.3%, and the MLP Index has grown 6.2%.  Those numbers don’t account for MLP distributions collected either, so the total return disparity would be even greater.
It looks like with one month left, and 700 basis points lead on the S&P 500, MLPs will have another year of market beating returns.  This routine outperformance is not an accident.  For the most part, MLPs are efficient users of capital as a result of the structure that forces management to go to the capital markets frequently, which serves as a check on management.  In addition, the assets MLPs own either have utility-like characteristics (but at much cheaper valuations), or they are benefiting from high commodity prices and low interest rates.  Those secular characteristics will likely remain intact at least for the next few years.  So, if you’re waiting for MLPs to have a down year relative to the stock market before you get involved with the sector, you may have to wait a while.
Global Partners Acquisition
Biggest news release of the week was a relatively small one.  On Monday, Global Partners ($GLP) announced that it will to Acquire $296 million of gas station assets from its Parent (press release).  Highlights of the deal:

  • Global will acquire 542 retail gas stations from Alliance Energy, LLC, an affiliate of its general partner.  
    • Alliance and Global’s GP are both almost 100% owned by the Slifka family.  
  • Global will fund the acquisition with combination of equity and debt:
    • 5.85 million L.P. units issued directly to Alliance at $19.89 (11/18 closing price)
    • $180 million of long term debt (GLP will get $100 million of capacity of its revolving credit facility to help)
  • Management indicated that they are hoping for cash flow returns in the mid-teens (before accounting for financing)
The 190 gas stations that GLP acquired from ExxonMobil in September 2010 have been a bright spot for GLP in a tough market for the rest of GLP’s business, so expansion of that business (and diversification away from the wholesale business) is a good thing.  

Other News

  • $EVEP resets IDRs (press release) – not unprecedented, but fairly uncommon.  Resetting IDRs has a neutral impact on cash flow initially, but over time is meant to lower the incremental cost of raising distributions by reducing the percentage that goes to the general partner.
  • Management at $LGCY was clearly in the office this week, as they made 2 announcements: 
  • Another milestone for $LNG and $CQP, $CQP announces 20-year agreement to sell 3.5 million tons of LNG annually (press release).

Winners and Losers
There were a few bright spots in the MLP sector this week.  The market seemed to view the GLP deal positively, with +3.9% change week over week.   Newer MLPs OILT and RNO were both up more than 3%.   High beta, limited trading volume small caps and  shipping names were the biggest losers this week, and they’ll likely be among the leaders if the market bounces this week.

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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