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November 2, 2014
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MLPs sold off this week, moving in the opposite direction of the broader stock market and other yield-based equities (like utilities). Interest rates and commodity price movements likely weren’t much of a factor in the underperformance. Distribution ex-date trading was likely in MLP weakness. Another potential driver is MLP investors reassessing valuations and long term growth expectations in light of what appears to be a sustained lower commodity price environment.
This week’s price action, uncorrelated with oil prices or the broader stock market, is an affirmation (although not a welcome one when MLPs are down) of the lack of correlation between daily movements of oil prices and MLP price changes. This week, we published a short whitepaper on the topic of MLP correlation with oil. You can find it here.
The end of this week marks the end of another month for MLPs. October was the second straight negative month for the MLP Index, which was down 4.7% including distributions. It was the worst October ever for the MLP Index. November has historically been a weaker month on average for MLPs, but seasonality has been off this year, with an unusually strong August and weak September.
Extreme Growth MLPs
Shell priced its MLP IPO this week. It was biggest, lowest-yielding MLP of all time, with the biggest first day pop after the IPO priced. SHLX’s strategy (similar to DM, EQM, PSXP and other high-profile growth MLPs) appears to be to get to the 50% tier as quickly as possible to recognize the IDR value as soon as possible.
This quarter, PSXP announced a distribution that is 49.2% higher than IPO in just the 5th quarter since IPO. That got me curious as to what the record is for the fastest MLP to get to the top tier. The record is 6 quarters for now, and PSXP will join the 6 quarter club below. EQM reached the 50% tier in 8 quarters.
Fastest to 50% tier:
Investor push back at IPO on incentive distribution rights has not existed because IDRs are thought of as something that only becomes a problem much later. If MLPs continue to push initial growth to the extremes, and total cash to the GP grows more quickly, does the life-cycle of some MLPs get shorter? Do they more quickly reach the point KMP reached this year where the IDRs make it difficult for the MLP to grow?
A shorter life cycle eventually could put pressure on MLPs to have better mechanisms in place at IPO for keeping IDRs in check. It’s hard for investors to push back when the growth MLPs have been so successful, but at some point the model might get too extreme, leading to a backlash among investors. The backlash may come when these extreme growth start launching IPOs of their general partners within 2 years of their MLPs going public.
Winners & Losers
Commodity sensitive (NSLP), distressed (NKA and RNO) or oilfield services MLPs (HCLP and SDLP) comprise the bottom 5 this week. The two most recent IPOs (DM and SHLX) and MLPs with strong earnings (ARLP) or announcements related to earnings (MPLX) dominated the top 5. Expect IPOs and earnings announcements to continue to show up at the top and bottom ends of the MLP return spectrum next week.
For the month of October, IPOs ruled on the upside while dramatic revaluations dominated the downside. SHLX and DM were both up more than 40%, followed by MPLX and ARLP each up more than 12%. On the downside in October, RNO and NKA were both down more than 50%, QEPM down 30%+ and upstream MLPs LGCY and NSLP were each down 20%+. Compared to last month when large cap, mature MLPs topped the MLP charts, this month it was much younger or smaller MLPs in the top 5.
Year to date, MPLX’s big week pushed it up into the top 5, displacing RRMS. NKA went from outside of the bottom 5 last week to second worst on the year this week. BWP, which was an early favorite for biggest loser of the year early in 2014, has floated higher on the list.
News of the (MLP) World
This week we saw two high up-front multiple, strategic acquisitions totaling $2.3bn, and updates on several large scale pipeline projects and a merger. But the highlight was the most successful MLP IPO of all time, on any measure. SHLX may have felt like they left some money on the table given the huge IPO pop, but on day one Shell saw the value of its retained 71% interest in SHLX grow by $1.0bn, so I think they’ll be ok.
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M&A / Growth Projects
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