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June 22, 2013

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Week Thoughts: MLPs Drained

MLPs dropped big again this week (-2.3%) and the Alerian MLP Index closed the week slightly higher (at 436.4) than its recent low hit on June 5 (436.1).  But for much of the day Friday, MLPs were much lower than they finished, with the MLP Index hitting 428.9 (down 1.7%) around 12:45pm.  Some of the swings that followed were wild (we’ll look at a few charts of them below just for fun), and prices were bouncing around erratically in the last 30 minutes of trading.  Not unusual to see wild swings on “quadruple witching” days (like today), but when coupled with the continued interest rate spike today, it produced some fireworks.  MLPs finished strong in the last few hours to finish flat for the day and roughly inline with the S&P 500’s 2.1% decline for the week.  There was very little MLP-specific news this week, so the moves were largely macro related.

Weekly Review_6-21-13

10-year US Treasury interest rate closed at 2.51% for the week, a staggering 39 basis points rise week over week and an 88 basis points rise from May 2nd (1.63%).  The 10-year rate hasn’t closed this high since August 2011. I’ve talked before about how MLP prices don’t correlate on a daily basis with changes in the 10 year UST rate, but the rise clearly has impacted MLPs, REITs, bonds and the broader stock market.  The rise has been driven by Fed signals of eventually slowing the money flow, but it’s become very clear that the last few years, the Fed is very concerned with stock market valuation, so the Bernanke put is probably still there at some point if the market continues to tank.
The current situation with the Fed is a lot like the end of my son’s bathtime.  I’d like him to exit the bathtub in a quick and orderly manner, but he just wants to splash around and play for a while longer.  If I abruptly tell him its time to get out of the tub and escalate that into an ultimatum, I can get him out of the tub, but it won’t be pretty.  On the other hand, if I take it step by step and explain what I’m doing as I go (like Bernanke is trying to do), the bathtub exit process can be (but isn’t always) seamless.  First, I’ll turn off the faucet, wait a few minutes, then open the drain, letting the water slowly dissipate.  My son will sometimes jump right out at that point, or he may continue playing until there is no water left.  The water makes an audible sound as its draining, adding pressure to the water play, which takes on a manic quality as the last few drops circle the drain.

Simon_Bernanke[fun in the tub with Mike Myers]

Bernanke is playing the role of the father (unlike the picture above) that just wants to finish the son bathing process so he can go sit on the couch downstairs.  He has told the market he will turn off the liquidity faucet.  Eventually he will, and liquidity will drain from the market, causing bonds prices to go down and rates to settle at a level higher than today.  The market threw a fit this week in response.
MLPs have had mixed performance in the face of rising rates, and MLP investors have been warned repeatedly the risks to valuations when rates start to rise for good.  So you could hope that rising rates are priced in to MLPs on some level, and that recent MLP investors who came to MLPs for the yield/income will stay for the secular growth story and the sector’s ability to beat inflation with distribution growth.  But hope is not an investment strategy.  MLPs have always been remarkably resilient, and I believe MLPs as a sector will eventually make new highs in the next 12 months, but it will be a tough road for MLPs as an era of unprecedented direct Fed intervention winds down.  So, pay attention and manage your MLP risk…or don’t worry about the value of your MLP portfolio and be satisfied with the growing income streams from MLP distributions.
I don’t know what the next week will bring, but these daily swings and jitters in the market can be traded with MLP ETN and ETF products, which I did today, or with individual MLPs.  Either embrace the volatility and try to profit from it, or ignore the market’s wild fluctuations and trust the investments you’ve made.  Like an old money manager friend once told me: don’t watch the market go down unless you’re going to do something about it.
Fun With Charts
As mentioned above, Friday had some pretty crazy action in the MLP index as well as many individual MLPs, which is not uncommon to see on the 3rd Friday of June, one of the four quadruple witching days of the year, when single stock options, index options, single stock futures and index futures are all expiring on the same day.
Below are charts of a few wild MLP charts that stood out.  First up is ETE, which dropped 1.6% to $53.16 around noon, then pivoted and closed up 3.3% on the day, for a 4.9% swing, most of that occuring in the last 30 minutes of trading.


NRP started the day up slightly, hitting a high of up 1.5%, and dropped to flat before the final 20 minutes of trading when NRP’s price dropped to 4.5%, an intra-day swing from top to bottom of 5.9%.
NRGY closed yesterday at $14.70, and was strong throughout the day, before taking off like a rocket, spiking 7.5% in the last 15 minutes of the day to close the day up 10.4%.
The last one I’ll highlight is TLLP, which started at $56.00 on Friday, dropped to a low of $53.13 (-5.1%), then TLLP’s price swung 7.5% to $57.14 and closed the day down 0.8% at $55.55, with the big spike happening in the last 15 minutes of the day.
Winners & Losers
NRGY was up big Friday and for the week following the completion of steps 1 and 2 of the CMLP merger.  Step 1 was distributing NRGY-owned L.P. units of NRGM to NRGY unitholders.  This transaction doesn’t add units to NRGM’s outstanding units, but it does put those units in the hands of potentially sellers (NRGY unitholders).
LINE bounced back hard after taking some more lumps on Twitter and via a conference call by Hedgeye.  Almost immediately after that call, Leon Cooperman came out in favor of his position in LINE (apparently him talking his book is more credible than when Jim Cramer does it), and LINE took off.  Smaller, less liquid MLPs were the biggest losers this week, drowning in sell orders amid market volatility.


For the year, LINE moved out of the bottom five with its big week.  EVEP and LRE continue to languish, however.  On the upside, HCLP replaced PSE in the top five this week, but not much changed among the winners.


The MLP Index is up 16.5% for the year, GPs are still way out in front with 20.9% average return.  Variable distribution MLPs are trailing, driven by weaker fundamentals in refining and fertilizer than last year.  Gold extended its slide and remains the worst asset class to have owned since the end of last year.


News of the (MLP) World


Not much happened this week on the news front, all the action was in the market swings.  There was a new MLP IPO filing, and a few small acquisitions.

  • World Point Terminals (WPT) files initial S-1 to raise up to $212mm in an MLP IPO

M&A / Growth Projects

  • Natural Resource (NRP) announces acquisition of non-operated working interests in producing oil and gas properties in the Bakken / Three Forks play in Williston Basin from Abraxas Petroleum Corp for $35.3mm

Corporate Actions

  • Vanguard Natural Resources (VNR) announces monthly distribution of $0.2050/unit ($2.46/unit annualized), flat month over month
  • Oiltanking (OILT) announces appointment of Jonathan Ackerman as VP and CFO.  Current CFO Kenneth Owen has been named Terminal Manager of OILT’s Houston complex
  • Inergy (NRGY) completes previously announced distribution on a pro rata basis to NRGY unitholders 56.4mm common units of Inergy Midstream (NRGM), equal to 0.432052 NRGM units per NRGY unit
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