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June 17, 2011

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Week Thoughts: Lows of 2011

Down week overall for the index at 2.8%, compared with flat broader markets and stable interest rates.  The MLP Index closed at 353.5, a fresh low for 2011, but still 16% higher than a year ago (not counting distributions).
Alerian MLP Index chart for week ended June 17th, 2011.

There was some rallying towards the end of the session in EPB, BWP, NRGY and a few others, on strong volume.  See the chart below of NRGY to see just how fast and how much it rallied in the last 15 minutes of trading.  Charts of EPB, BWP, ETP and KMI look very similar, whereas, names like EPD, WES, NGLS and PAA were down on strong volume at the same time.

The selling pressure this week seemed to come from weakness in commodity prices generally (oil was down in the $93 area late Friday afternoon, from close to $100 a week ago), but also from renewed fears over tax legislation after the vote to end Ethanol subsidies.  The rationale, I guess is that if the Ethanol subsidies are not off limits, then partnership tax treatment for MLPs might not be either.
There were a few outsized moves in either direction driven by the very large M&A announcement from ETE and the announcement that a few new names would be added to the Alerian MLP Index.  The Alerian Index is tracked by several public MLP investment vehicles, which need to rebalance by buying the new names and selling the replaced ones.
ETE was up on the big news that it was buying SUG for $4.2 billion in equity and the assumption of $3.7 billion in debt.  It is very unusual for a public GP like ETE to buy operating assets and reinvent itself as an entity that can drop down assets.  ETE’s management team is very “creative” financially and is clearly trying to raise the growth profile of all entities by first buying the assets at ETE, then over time selling them down into the MLP.  ETE is now significantly more complicated to value with operating assets as well as the MLP interests in both RGNC and ETP.  ETE/ETP/RGNC/SUG may have overtaken EPE/EPD/DEP/TPP, before EPD decided to fold TPP into EPD and re-consolidate DEP and EPE.  This big deal for ETE doesn’t change the fundamental weaknesses in a few of its business lines, notably intra-state transportation (weak basis differentials), natural gas storage (flat futures curve for natural gas), and propane (weak volumes and margins).  Time will tell how it all shakes out, but adding the stable natural gas pipeline businesses from SUG should help ETE/ETP raise debt at more attractive levels going forward.
Some MLPs look very attractive here, we’ll see how the action goes next week and if we can finish the quarter on a high note.  See below for a chart on the top five winners and losers of the week.

Top 5 winners of the week: EXLP (+5.4%), STON (+3.4%), ETE (+2.4%), CPLP (+1.5%), BPL (+1.4%).  Only 10 of the 71 MLPs I track closely were positive for the week (14%).  EXLP got a boost this week from the announcement that it was being added to the MLP index.
Top 5 biggest decliners of the week: XTXI (-12.9%), HEP (-8.7%), TRGP (-8.3%), GEL (-8.2%), CQP (-7.5%).  HEP had a rough week.  The market reacted to HEP being removed from the Alerian index this week, to be replaced by Crestwood Midstream (CMLP), which was up approximately 1% this week on the news.  HEP is a pretty thinly traded MLP, with an average of just $1.8 mm in average daily trading value the last 3 months, so any news positive or negative can lead to large moves either way.
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 HEP, RGNC, ETP, NRGY, EPB, BWP, KMI, WES, NGLS.

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