April 10, 2016
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MLPs made it two straight positive weeks with a 1.9% gain. This time MLPs de-coupled from the broader stock market and re-coupled with oil. Oil prices are the headline, rallying 6%+ on Friday alone. But NGL prices had a strong week as well, particularly ethane which is up year-over-year even as everything else is down big (its only $0.02/gallon, but still).
MLPs have now traded up in 7 of the last 9 weeks since hitting rock bottom in early February. Despite the 32% bounce off the bottom, MLPs are still down 5% overall this year, including distributions. The down weeks have been bigger than the up weeks, which is keeping a lid on investor enthusiasm a bit, especially ahead of earnings season that will showcase still challenging conditions for volumes and commodity prices.
Less enthusiasm is probably healthy for the sector right now. MLPs staying under pressure is necessary to have a hope of real structural changes to the way the sector has heretofore operated.
I thought we were done with the 30s?
Oil prices are about as fickle as the weather these days. Back in early March, there was a week straight of 70-degree plus days in Philadelphia. By the end of that week around my house, all the winter clothes were packed away, stacks of mulch bags materialized in the backyard, and the lawnmower was being prepped for action. Then today (in the second week of April!), we have lows below 30 degrees and a blizzard that dumped several inches of snow. We’ve had to scramble to pull the winter gear back out while those bags of mulch remain untouched.
Oil prices broke $40/bbl a few weeks back. The market seemed to be warming up, but once the short covering dried up, familiar questions about oil fundamentals returned and oil was back in the mid-$30s again. Was this latest trip down to the mid-$30s the final cold snap of this long winter for oil prices? Maybe so.
My backyard looks bleak right now, and there may be another snow storm somehow before its all over, but we can all agree that at some point by the middle of the summer, I will be able to spread this mulch while comfortably wearing a t-shirt. Most people probably have similar thoughts with regard to an eventual recovery in oil prices. The problem is most people probably had similar thoughts this time last year.
Poll Question
Earnings season is fast approaching. MLP correlation with oil prices remains very high, so MLP investors remain in the awkward position of rooting for macro production declines and hoping it doesn’t translate into volume declines on the micro MLP level. This week’s question tries to get a sense of whether MLP investors are ready to look through bad results if commodity prices point towards an eventual recovery in U.S. production.
Sorry, there are no polls available at the moment.
Winners & Losers
RRMS and SDLP went from worst to first this week on the oil rebound and fickle extreme daily volatility. WPZ made it two straight weeks in the top 5 with another 10% gain. CEQP didn’t repeat last week’s rally despite a positive resolution with Bluestone Energy, probably due to the lack of details and clarity on distribution strategy. The bottom 5 included 3 high multiple MLPs in CPPL, PSXP and AM. If commodity prices continue higher, expect further rotation out of insulated MLPs that have held on to high multiples over the last 18 months.
On a year to date basis, NGL climbed a few notches within the bottom 5, helped by the sale of TLP units. MPLX joined the bottom 5 despite a positive week. Not much change among the top 5.
General Partner Holding Companies
General partners outperformed MLPs, as is typically the case in a commodity-led positive week. ETE looked to benefit from speculation that the merger may not be on firm footing, given WMB’s initiation of litigation. Unwinding of whatever merger arb traders were still involved with the merger may have helped ETE spoke 17%, without a corresponding rally for WMB. The cleanest GP stories with the most stable MLP subsidiaries, TEGP and EQGP, went from first to worst among GPs this week on no news. Thin floats for each tends to exagerrate selling pressure of any kind.
News of the (MLP) World
Capital markets continue to show signs of healing, with the help of creative alternatives. Spectra’s “Human Centipede” and NGL’s final divestiture of its TLP stake combined to raise more than $600mm without tapping the traditional retail MLP investor base. Debt capital markets deals were executed. Also, the market sidestepped a potential negative contract rejection headline from the new Quicksilver owners. Finally, WMB put their foot down on recent ETE behavior, and the market seemed to take that as a good sign. So, it was a busy week, but news was positive overall.
Financing
M&A / Growth
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