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November 5, 2011

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Week Thoughts: MLPs Beat Stocks in Volatile Week

Same story, different week… MLPs had a solid week, down 1.0% in a tough week for the broader stock market (S&P 500 down 2.5%).  After tons of hype around what a great month of October stocks had, the first week of November was a rude awakening.   The S&P 500 was down more than 2.4% on Monday and Tuesday, for a combined 5.2% from Friday to Tuesday, as the Europe Euphoria from last week unraveled.

Those first two days were classified as “all or nothing days”, where at least 400 of the 500 members of the S&P 500 move in the same direction.  According to Bespoke Investment Group, more than half of the trading days since August 1st have been all or nothing days.  As Josh Brown noted this week, the market is so correlated these days, its like one big ETF.  While that may be true for the S&P 500, MLPs have outperformed stocks lately and they seem to be trading more on individual fundamentals than the market of late.
MLP performance was particularly strong if you consider there were many ex-dates this week for quaterly distributions.  When a distribution record date passes, the following day that MLP is typically under selling pressure because in theory the price should reflect that distribution just paid and also because there are investors who play distribution capture games and will move money around trying to catch distributions.  This week each quarter when the majority of ex-dates occur is typically very volatile.  Sector-wide fundamental strength and rebounding commodity prices helped make this quarter an exception.
The chart below shows the action this week for the MLP index.  While Tuesday was a sharp down day just like the S&P 500, MLPs did much better than the S&P 500 on Monday (down only 0.5% compared to -2.4%), and that relative performance carried MLPs through the week.

Drinking from the Earnings Firehose
More than 35 MLPs announced earnings this week.  Results were mixed versus expectations, with gathering and processing firms doing well overall, but specifically ones with liquids rich shale exposure.   Crude and refined products storage and transportation MLPs have surprised to the upside (names like $PAA, $SXL, $MMP).  Diversified MLPs with NGL assets and crude assets (like $EPD and $OKS) also had positive earnings.  E&P MLPs were a mixed bag as well, but generally solid, with strong results from $LGCY and $PSE beating the street, and $LINE, $VNR and $EVEP missing expectations.
The one standout negative surprise was Niska Gas Storage ($NKA), which missed already low expectations and lowered full year guidance.  NKA also announced that distributions on its subordinated units will be suspended.  This doesn’t happen very often, and it can either be step one in a process that results in common unit distributions being suspended as well, or it can be a smart financial move that allows the partnership to strengthen its financial position in a down market, only to reinstate the distribution on subordinated units when operations rebound.  Either way, it’s not a good sign, but it was also not the first sign of trouble for NKA, which is down around 45% for the year so far.
Overall, this earnings season was similar to recent quarters. Gathering and processing had strong results due to continued strength in NGL demand and pricing.  Crude and refined products beats were pleasant surprise, but highlights stabilized demand and growth on crude supply from new supply areas.
There was one IPO (Rentech Nitrogen Partners, see here for my thoughts) and one follow on equity deal this week.  With distributions out of the way and unit prices up, I would expect several more equity deals in the next few weeks.
Winners and Losers
There were no high fliers this week on the positive side, but NKA and TGP (announced and priced $183mm follow on equity deal Wednesday afternoon)  led the losers.  The big winner from last week, CQP, fell out of favor this week.  MMLP released disappointing earnings, which dragged its price down. and TGP picked a tough week to do an equity offering and was hammered as a result. Distribution ex-dates held MLPs down as is typical of earnings week each quarter.

Not pictured here, XTXI was down 10.3% to lead the GPs, following its subsidiary, XTEX, which was down 5.3% on disappointing earnings.
Non-Earnings Announcements
There were also quite a few non-earnings announcements this week, including multiple E&P acquisitions.  I repost links to them here without comment.

  • EPD to expand infrastructure in Eagle Ford Shale, by adding another 300 mmcf/d train at its Yoakum facility and 62 mile pipeline to gather and transport an additional 300 mmcf/d (press release)
  • Chesapeake and EPD ethane pipeline deal in the Marcellus Shale (press release)
  • EROC expansion in panhandle, will install 125 mmcf/d  high efficiency cryogenic processing plant in Granite Wash play (press release)
  • GEL to acquire interests in crude pipelines own by Marathon Oil for $205.8 million (press release)
  • BPL acquires 2 propane storage caverns (press release)
  • BKEP rights offering deal update (press release)
  • LGCY acquires properties in Permian and Wyoming for total of $72.5 million (press release)
  • EVEP announces joint acquisitions of Barnett Shale properties with parent, EVEP portion for $372.3 million (press release)
  • LINE acquires $600 million of Granite Wash properties from Plains Exploration (press release)

Final Distribution Update for Quarter
65 MLPs I follow announced distributions, and 34 (52%) announced increases.  Average quarter over quarter distribution change is +1.6%.  This week’s announcements:

  • BIP and NKA held distribution flat
  • BWP raised distribution 0.5%
  • BPL raised distribution 1.2%

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.

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