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June 18, 2017

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Week Thoughts: Head or Gut?

MLPs had a fourth consecutive 1%+ weekly decline, a streak that hasn’t happened for the MLP Index since October 2008.  Oil prices declined for a fourth straight week as well, big coincidence.  Both are looking a bit oversold at this point.  The trick may be in convincing Amazon that it needs to secure access to refined products for its trucks and airplanes, or natural gas to power its drone deliveries of organic produce.

Interest rates hit 2.15%, down 29 basis points to start the year, and utilities again are big winners.  With oil prices unstable, MLPs are tied to other energy stocks and don’t attract income investors, even with a 7.4% yield on the AMZ.  Natural gas prices held steady on a good inventory number Thursday, and that helped light NGLs hold steady as well.
Quite a Pickle
On Thursday, the MLP Index price index (not including distributions), hit a 52-week low, closing below its level from just before the presidential election (11/4/16).  As mentioned above, MLPs have traded off dramatically for four straight weeks, a nearly unprecedented string of steady negative trading.  We haven’t seen the volatility of early 2016 when 5% moves up and down were common.  But a low grade depression has set in for the MLP sector, resigned to trading in lock step with oil prices, with little visibility into a catalyst before volumes improve in late 2017.
Even if that volume ramp MLPs expect comes through, outlook for future volume growth may be challenged if oil prices cause a slowdown in activity.  The oil market is sending a loud message to U.S. producers that despite apparently attractive short-cycle wellhead economics, U.S. producers need to slow down to balance the market.
Where does that leave MLPs?  It leaves them between a rock and a hard place.  I’ve read analyst reports that discuss this paradox for MLPs.  The theory goes something like this. If production continues to ramp in the U.S., oil prices will remain challenged and MLPs won’t trade well.  If U.S. producers slow down, MLP volumes won’t see the sustained rebound that was expected, and MLPs won’t trade well.
The situation MLPs now face reminds me of movies that are so bad they’re fun to watch, movies that you know are bad, but enjoyable anyway (e.g. any Steven Seagal movie). And it reminds me of one of those movies in particular, The Last Boy Scout, for a few reasons.

The Last Boy Scout, starring Bruce Willis and Damon Wayans, came out in 1991.  It was like an odd cross between Die Hard, Bad Boys and Any Given Sunday.  It has all the tropes.  Halle Berry gets gunned down mafia style early in the movie, the bad guy is a pro football team owner, the opening scene involves a running back (played by Billy Blanks) pulling a gun during a play and shooting defensive backs while carrying the ball.
Bruce Willis plays a washed up former hero who hates himself, smokes lots of cigarettes and gets yelled at by a police chief, but is also somehow indestructible.  I probably saw it 20 times on HBO growing up.

Twice in the film, Willis’s character asks another character a simple question: “Head or gut?”.  He is going to punch the guy, but is offering an option of where he will direct the punch.  If you believe in the MLP paradox above, this question would seem appropriate.  The market believes MLPs will be punched, either by falling prices or reduced production growth outlook.
But is there a third option where we already got punched?  Could a pending slowdown in U.S. production growth be priced in to some extent?  Could sentiment be so bad that the actual event of producers slowing down be met with positive MLP price action (especially if oil prices rise)?
I think it’s possible, but MLPs would need to shift back into a more defensive mode and finish the self-help that some started last year.  Or maybe it doesn’t matter much what MLPs do, and they probably trade up whenever oil prices trade up, no matter what the cause is for an oil rally.
In any event, Happy Father’s Day everybody, for some of you this may be the only day when you get to force the family to watch one of these unintentional comedy film classics.  If you need suggestions, click here for a list of 50 great bad movies.
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Winners & Losers
Strange things tend to happen on index rebalancing and options expirations days.  AMID had the best week this week, with a substantial portion of its gains coming in the last half hour of trading Friday, on its way to a +19.6% day on no news and no index additions, as far as I can tell.  USAC traded up sharply early in the week and held up amid volatility Wednesday and Thursday.  In a risk-off tape, APU attracted some interest, up 5.8% this week.  On the downside, the biggest YTD losers (NGL, CCLP, TOO) continued to lose ground, while ETP is still searching for a bottom and broke below $20/unit this week.

SRLP made it two straight weeks in the top 5, up another 10% this week.  Some small cap, below the radar MLPs are proving to be resilient so far this year.

YTD Leaderboard
OKS popped back into the top 5 this week, displacing SUN.  AMID climbed out of the bottom 5, and misery at the bottom continued for TOO, CCLP and NGL, as noted above.

General Partners and Midstream Corporations
It was pretty ugly for GPs and corps this week.  SEMG was near the bottom for a second straight week, along with other MLPs that tend to trade off when oil drops (LNG, TRGP and PAGP).  Only three GPs/Corps were positive this week, with OKE the real outlier as the merger close approaches.

News of the (MLP) World
Radio silence from the MLP press release machines this week.  In a better tape, we’d likely have some equity deals to report on, but maybe the recent pain will lead to M&A or JVs we can report on in the future.

Growth Projects / M&A

  • WPX Energy (WPX) agreed to form JV with private midstream company Howard Energy Partners to develop oil gathering and natural gas processing infrastructure in the Delaware Basin (press release)
    • JV will support WPX’s drilling, representing 50,000 net acres, or 37% of WPX’s roughly 135,000 net acre position in the Delaware
    • Transaction implies a $863mm value for oil gathering and gas processing projects
    • WPX receiving $300mm upfront for Howard Energy
    • Howard Energy to fund the first $263mm of JV capex, including $132mm carry for WPX
  • Plains All American (PAA) announced open season for up to 110,000 bbls/d of pipeline capacity from the Delaware Basin to Cushing (press release)
    • PAA has another open season for 350,000 bbls/d of capacity from Midland to Cushing that is still outstanding


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