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August 9, 2015

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Week Thoughts: MLP Bets Off

Any pieces picked up with last week’s MLP rally crumbled into dust this week, on further weakness in oil and tempered guidance from earnings releases, exacerbated by bearish industry comments from PAA’s CEO Greg Armstrong.  Those comments sent the MLP Index into a 5%+ tailspin Wednesday, the 3rd 5%+ down day since (and including) November 28th.  When the dust settled, the MLP Index had declined 9.7% (8.9% including distributions) in just a week.
Weekly Review_8-7
Beyond oil’s ongoing slide and negative energy sector sentiment generally, the macro environment wasn’t a negative contributor, with interest rates flat, S&P 500 down 1.2% and utilities up 1.1%.  The lone bright spot was natural gas, up from last week, and down just half as much as oil over the last year.
PAA Goes Full OPEC
On Armstrong’s comments, PAA was down 15.3% on the week (and is down 42.1% from its peak in September), while PAGP was down 31.0% to well below IPO price.  Armstrong expressed frustration over the excess of capital and development in its areas of operations, and PAA’s inability to find M&A bargains.  He also suggested potentially keeping PAA distributions flat in 2016 as a transition year to build coverage back up.
His comments, which didn’t seem pre-meditated, could be construed as an attempt at an OPEC-like strategy of hurting all MLPs to weed out weaker players so that PAA could emerge stronger in the long-run.  I’m not sure PAA management, as savvy as they are, is that calculating.  Intended or not, the comments may have the effect of hastening the process of weeding out the weak or capital constrained MLPs, while wounding PAA in the process.
Breaking Support
This week’s action was a scary testament to the skittishness of the remaining MLP investor base.   Almost a year into the longest bear market in the history of the MLP space, the investor base is losing faith.
Midstream overbuild solves itself in a very painful way if the investment community refuses to fund external development.  MLPs are a unique sector where all of the cash flow is paid out, so if an MLP wants to grow, they need to access the capital markets.  One of the first risk factors listed in every research report is that if access to capital were to be restricted, it would be a problem for the MLP discussed in the report.
The investment community is voting with their wallets, and if the selling continues, it will be supporting a slowdown in development of energy infrastructure, and may actually force it to happen by refusing to finance the sector’s development plans.
This could lead to some broken MLP stories that were dependent on accessing capital markets to fund growth projects.  It also clearly impacts those that were banking on the equity markets to support marginally accretive drop down acquisitions.  That doesn’t fly any more.  PAA’s complaint of too much capital being available is timely, but really the MLP equity market crisis had already begun.  July saw fund flows into retail MLP products turn negative for the first time since the financial crisis.
Historical Context
This week’s 8.9% decline was the 8th worst in the history of the MLP Index.  There was a worse week in the last 12 months, in the middle of December last year.  Every other one on the list of the top 10 happened in the financial crisis or in September 2001.  By the measure of number of terrible weeks in the midst of a crisis, the current oil-related MLP crisis now has 2 out of 10, and the global financial crisis accounted for 7 of 10.  The last weekly selloff of this magnitude saw a relief rally the following week, but a total bounce back hasn’t really ever happened after these big drops.
Worst Weeks
Most of the big drops on the list above, however, were not the result of MLP-specific or even energy-specific issues.  Given the recent price action, bearish sector commentary by participants in the sector and fund flows that turned negative in July, all bets are off as to the buoyancy of MLP unit prices over the next week.  I guess that’s the point of a large selloff, investors are taking their MLP bets off.  The concern at this point is how many more bets still have to come off before funds flow back in.
Winners & Losers
“Winners” is a relative term this week as there weren’t many winners.  The top five performers were among only seven MLPs that generated positive returns this week.  GMLP bounced back from last week’s appearance in the bottom five and was the best performer for the week, after its parent announced a unit repurchase program. Interestingly, the top and bottom five were dominated by E&P MLPs with significant disparity between the top and bottom.  Investors reacted positively to earnings from BBEP, LGCY, and MCEP.  MEMP was the latest E&P MLP to cut the distribution propelling it into the bottom five for the second consecutive week.
LINE and NSLP also remained in the bottom five for the second consecutive week.
On the YTD chart, there weren’t any changes to the list of MLPs from last week, just a slight reshuffling of the order.
There was significant disparity in returns among GPs this week although all generated negative returns.  PAGP went from first-to-worst after reporting earnings and offering up a subdued outlook.  SEMG, TRGP, ENLC, and OKE were also likely impacted by Plains’ comments but also earnings which failed to impress investors.  SE was a relative winner after reporting solid earnings.
News of the (MLP) World
No equity this week, and none expected until after Labor Day.  The equity markets tend to shut down after the second week of August every year, but this year the market shut itself down early.  It will be very interesting to see where the sector is come September and how that first equity deal goes, because as bleak as things look now, there will be MLP equity offerings at some point in the future.  Outside of earnings, there was little news this week in the way of project announcements and M&A.
M&A / Growth Projects

  • Azure Midstream (AZUR) announced $83mm drop down acquisition of Azure ETG, LLC (press release)
    • Funded with $80mm on revolving credit facility and the balance from equity issued to its general partner
    • AZUR’s GP also announced a growth project within its Holly Gas Gathering System earlier in the week (press release)


  • Energy Transfer Equity (ETE) makes it to the next round, of American M&A Warrior, aka the Williams Companies (WMB) sale process (Reuters)
    • ETE also has reportedly tried to corner the market on bankers by signing up 7 as part of their bid
  • Golar LNG Limited (GLNG) announced approval for $25mm repurchase of Golar LNG Partners (GMLP) over the next 12 months, effective immediately (press release)
    • It will be interesting if we see any larger MLPs announcing buyback programs over the next few months, now that it’s clear the market is puking on any MLP issuing new units
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