Returns for the Alerian MLP Index were slightly lower than flat for the week at -0.2%, but well below those of the S&P 500 at +1.3%. Sharply lower commodity prices and some weak 4Q13 results by a few prominent MLPs (MWE, LINE, BBEP, XTEX, VNR and CMLP within the index) helped drag down the MLP index, while the S&P 500 hit another all-time high, and swung to a positive year-to-date return.
For the month, MLPs were down 0.2%, and are up 0.4% for the year so far. An update on where the MLP Index stands relative to recent past performance is below.
Natural gas futures prices were down 7.9% week over week, but there may have been a monthly changeover in the futures that made that drop look less drastic than it was. Spot natural gas prices dropped more than 20%. Ethane and propane prices likewise saw massive week-over-week declines, while oil prices were basically flat.
Earnings results were mixed this week, with the likes of OILT, TEP, and WES producing strong results, while names like LINE, BBEP, and MWE disappointed. Earnings season started off strong, but this week’s results were less encouraging overall. The press release machines have come to life again with drop-down announcements aplenty and large capital markets activity in debt and equity this week. M&A activity, even if it’s mostly drop downs, is encouraging as M&A was a big driver of intra-sector returns last year.
Tax Reform Proposal
In MLP tax news, Senator Camp’s tax proposal (released on Wednesday, details can be found here) seemed at first glance to leave traditional energy MLPs unscathed. If the intent is to spare energy MLPs from taxes that’s great, but there are some energy MLP implications to the proposal in its current (and very far from final) form. The removal of rent and dividends from the definition of qualifying income will impact certain MLPs (including those with corporations embedded in their org charts). Also, IDR owners could fall under the carried interest umbrella that will be subject to tax. The market reaction seemed to focus on the positives, however, as MLPs rallied sharply on Wednesday afternoon after the proposal was released, so maybe energy MLPs really will escape intact.
Not my First Rodeo
The Houston Livestock Show and Rodeo kicked off this week. The 20-day event, considered the city’s signature event, has been held in Houston since 1931. Entertainers from Elvis Presley to Willie Nelson to Justin Bieber have played the event. I remember spending many a night as a kid in the parking lot of the Astrodome where the carnival was (and probably still is?) set up, alongside rows of booths featuring every possible variety of food on a stick. The George Strait’s and Garth Brooks’s of my youth have been supplanted by newer country stars whose names I don’t recognize and by pop acts like Usher, Maroon 5, and Robin Thicke, but the Rodeo appears to be as popular as ever with 2.5mm people attending in 2013 (by comparion the Houston Astros drew just 1.65mm fans in 2013).
One of my favorite events at the rodeo was always the calf scramble. It features 26 students chasing 14 calves. Each student that gets a calf is awarded a $1,250 gift certificate to purchase a “registered beef heifer”. In the event, all the calves are roughly the same and the kids are mostly in the same age range. It is mass chaos.
If I were to attempt a comparison between a calf scramble and the current MLP market, the MLPs would be the calves, but they would be varying sizes and they’d be running at varying speeds. The MLP calf scramble would include a big mob of people chasing these calves, but they’d mostly be chasing after the fastest and fittest ones, largely ignoring the slow, sickly ones.
The current market dynamic wherein MLPs with great prospects trade much better than those that have weaker prospects is directionally rational, but can get irrational if the spreads between the haves and have-nots grows too wide. The crowds chasing the haves MLPs can grow large enough to encourage some investors to peel off to take a second look at the slower and weaker bum steer MLPs. So far, that’s been a dangerous proposition, and some investors have ended up trampled (see BWP and EPB). In any event, like the calf scramble, it’s great fun to watch.
Winners & Losers
For the second straight quarter, MWE disappointed the market’s expectations and pushed out its distribution ramp up deep into 2015. Two prominent analysts cut their rating on MWE Friday, which helped the initial Thursday selloff carry into Friday. MWE stated on its earnings call its goal of re-entering the top quartile of the sector in terms of annual distribution growth rates (which management has stated is high single digits, low double digits). The visibility is there for the distribution growth to ramp up, given its processing capacity dominance in the Marcellus and Utica shales and lack of IDRs, but at this point that visibility might require binoculars to spot on the horizon.
On the positive side of the ledger, TEP and OILT announced strong results and both indicated drop down transactions are in the works at their respective parent companies. NKA hit the top five for the second straight week, as it continues to recover after its big selloff around when BWP cut its distribution.
Year to date, TEP has taken the lead from PSXP, which was downgraded on valuation by one analyst early in the week. Small-cap compression MLP GSJK popped into the top 5 this week, displacing VLP. On the negative side, NKA climbed out of the bottom 5, replaced by AMID.
News of the (MLP) World
One very large equity offering, and two debt deals this week indicate the capital markets may be ramping up again. But the big action this week was in M&A. We saw 4 separate drop down acquisitions announced, one asset sale (RNO), and two related third party transactions (EXLP and ACMP). Most of these drop downs were telegraphed (WPZ) or expected as part of an ongoing drop down program (DPM, MPLX, WES). We still haven’t seen the anything like the big third party M&A or MLP-on-MLP M&A that we saw last year, but it’s still early in the year.
M&A / Growth Projects