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October 4, 2015

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Week Thoughts: MLP-90X Extreme Squeeze

After the dust settled on the craziest week of MLP price action since late 2008, the Alerian MLP Index finished the week up 3.9%, breaking a four week losing streak.
Weekly Review_10-2-15
Each day of the week saw the index move more than 3.5%. It opened with two 5%+ decline days; only the third time ever the index has fallen 5%+ on consecutive days. That was followed by the best day ever for the index that didn’t happen in Fall 2008, and the third best day of all-time overall. MLPs followed through on that bounce with two consecutive top-30 all-time days. The index finished the week 17.0% higher than Tuesday’s close, but remains 35.6% (on total return basis) below the August 2014 peak.
The rally was concentrated among the larger MLPs, perhaps an indication of short covering for the few large MLPs that can be shorted. Big cap MLPs EPD (+8.9%), PAA (+13.0%), and MMP (+8.9%) fall into that category. The Alerian MLP Equal Weight Index trailed the cap-weighted Alerian MLP Index by 180 basis points this week. Smaller MLPs participated on the downside along with large caps, but have some catching up to do if the rally continues.
MLPs outperformed utilities and the S&P 500, which both had strong weeks, helped by Friday’s huge positive reversal after the weaker than expected jobs report pushed stocks lower on the open. The U.S. 10-year rate closed below 2%, down 17 basis points on the week.
MLP businesses are sustainable, but is the MLP rally sustainable?
Everyone is hesitant to call the bottom, because it’s been a losing proposition the last year (see below for the head fakes the index has thrown). However, none of the lower lows this year had the volume and extremes of this week’s action, which was very similar to the action we saw in late 2008 when MLPs hit their ultimate bottom. But even after the ultimate bottom in November 2008, MLPs remained volatile for several months before starting their sustained recovery in March 2009.
AMZX Chart_10-2
Rallying Cry
The post I published earlier this week was well received both here and at Barron’s where it ran on Thursday. Thanks to everyone who read the post, and thanks for all the positive feedback. There were a number of readers who initiated the post by asking for a response. It seems like the original negative post on MLPs did incite real market moving fear among individual MLP investors, evidenced by the number of buy side firms with responses of their own, likely the result of many inquiries to them as well.
It is interesting how easily conviction can wane when faced with sharply declining stock prices. The questions I heard from individuals early in the week carried with them a heavy dose of fear: “Oh, I know that guy doesn’t know what he’s talking about…but is he right? How many of my MLPs are going to be able to keep paying distributions?”
The MLP collapse over the last year hasn’t been driven by blogs (in either direction, as much as we’d love to take credit for the back half of the week). Its been driven by uncertainty around 3 important factors that drive an MLP’s ability to grow distributions:

  • Return on capital
    • Returns for existing and under construction assets in an environment of slowing activity have been in question, gaining momentum with the contract restructuring WPZ and CHK announced in early September.
  • Capital opportunities
    • Concerns over capital deployment opportunities have been stoked by PAA management and by mainstream articles about over-piping in certain areas.
  • Cost to deploy that capital
    • USAC and AMID’s challenging equity raises early in September made it clear that capital access will be challenged for MLPs for some time.

The length of the commodity selloff has brought us here. In a v-shaped commodity price recovery (sort of what it looked like through 6/30 this year), there would have been concerns in the short term over returns on capital based on commodity exposure, and names with exposure to that would get sold off (upstream, oilfield services, processing MLPs). But the other two factors (capital opportunities and cost of capital) generally would have remained benign, and the correction would have been shallower.
MLPs will find it challenging to grow if the current environment persist, but the rally this week is a sign that the market overshot to the downside in trying to reflect those challenges in stock prices.
Status Update
It seems so long ago after the mid-week recovery, but let’s revisit September quickly and tally up where we stand at the end of three quarters. MLPs finished September down 15.3%, the 3rd worst month ever (behind September and November 2008). This was the 5th straight negative month for MLPs, tied for the longest streak ever (set earlier this year). The other 5 month losing streak (-16.3% total return) was mild in comparison with the current one (-31.1%). MLPs finished 3Q down 22.1%, the worst quarter ever for the index. At the end of September, MLPs were down 30.7% for 2015 (but by Friday down just 25.4%).
Status Update_9-30-15
Looking forward, October has been one of the most consistently positive of all months for MLPs over the years, due to the tailwind ahead of 3Q distribution payments. Given how fat MLP yields have grown in the recent slaughter, I expect some of the October buying we’ve already seen is in anticipation of that next quarterly payout.
Winners & Losers
There was significant disparity among the top and bottom performers this week. JPEP bounced back from last week’s appearance in the bottom five to claim the top spot. RRMS and SHLX, both dropdown growth vehicles rebounded from significant recent underperformance to make the top five. The bottom five consisted of MLPs with non-traditional assets with the only common thread being coal MLPs FELP and CNXC. HCLP showed up in the bottom five for the second week in a row as frac sand fundamentals continue to deteriorate.
VLP joined the top five performers for the YTD period replacing FGP while the bottom five names remained unchanged, although HCLP took over the bottom spot from LINE.
General Partner Holding Companies
GPs underperformed MLPs this week and didn’t get the bounce some MLPs had. EXH was the top performing GP this week on no news. Among the bottom five, CPGX and EQGP made the list two consecutive weeks while AHGP was down perhaps in sympathy with weakness in coal MLPs.
News of the (MLP) World
MLP distribution announcements for 3Q have already started. EPD’s distribution announcement and continued insider support were likely a factor in its positive performance this week. Some mild capital markets activity was announced. We also got the formal announcement of a new MLP joining Energy Transfer’s flying circus of MLPs, bringing the total number of tickers for the Energy Transfer complex to 6. After the wild ride for the market, this blockbuster deal is almost an afterthought.
Capital Markets

  • NuStar Energy (NS) filed equity distribution agreement to sell up to $500mm of common units at the market (filing)
  • VTTI Energy (VTTI) priced of $245mm of senior notes of varying maturities (10 year weighted average) for average coupon of 3.9% (press release)
  • Enbridge Energy (EEP) priced of $1.6bn senior notes, including:
    • $500mm of 4.375% senior notes due 2020
    • $500mm of 5.875% senior notes due 2025
    • $600mm of 7.375% senior notes due 2045

M&A / Growth Projects

  • Kinder Morgan (KMI) announced additional commitments for Northeast Direct natural gas pipeline development (press release)
  • Energy Transfer Equity (ETE) and Williams Companies (WMB) announced merger agreement (press release)
    • No change to the value of the deal, as priced in ETE units, but ETE added some cash to the deal
    • Large cost and commercial synergies expected by ETE, but limited details on those synergies was announced


  • Enterprise Products (EPD) announced quarterly distribution of $0.385, an increase of 1.3% quarter over quarter, or 5.5% year over year (press release)
    • 45th consecutive distribution increase, has increased distribution every quarter since the middle of 2004
    • Additionally, the Duncan family, through ownership of EPCO, EPD’s G.P., has agreed to purchase $50mm EPD units through the company’s distribution reinvestment program
    • This brings the total to $200mm invested by EPCO in EPD through the reinvestment program so far this year
  • TOO announced 4% distribution increase
    • This is TOO’s first distribution increase in 7 quarters
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