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September 14, 2014

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Week Thoughts: MLPs Fall Back

MLPs held up for most of the week, and were flat heading into Friday, when they fell sharply, along with the rest of the energy sector (the S&P 500 Energy Index -1.5% Friday and -3.7% for the week).  Lower crude oil prices appear to be the culprit when it comes to weak energy stock performance.  Rising interest rates hit utilities hard (UTY -1.8% Friday and -3.1% for the week).   MLPs, susceptible to both rising rates and lower commodity prices, outperformed energy stocks and utilities (MLP Index -1.8% for the week).
Weekly MLP Review_9-12-14
The interest rate on US 10 year Treasuries rose 15 basis points this week, including 8 basis points Friday.  The 10 yr rate is now 2.61%, the highest it has been since July 7th.  That July 7th high came immediately after a week when the rate rose 12 basis points, and marked the beginning of the worst July ever for the MLP Index (-3.6%).
Oil continued its slide this week, with WTI closing at $92.30/bbl, down 1.1% for the week.  Brent crude oil closed below $100/bbl for the first time in 17 months this week, on the strength of supply growth in the U.S. it appears.
2% Down Days
The MLP Index was down more than 2.5% intraday on Friday, and was more than 2% down for most of the day.  I knew it had been a while since the index closed down more than 2% in a single day, so I started tallying up such events over the last 7.5 years.  It hasn’t happened since June of 2013, and it is happening with much less frequency in recent years, as shown below.  MLPs rallied in the final hour of trading to keep 2014 free of 2% down days.
2 percent amz declines
The shallower nature of intra-day MLP selloffs these days may be attributable to the increase in institutional capital monitoring the sector.  When MLPs seems to be so well-positioned fundamentally, and when stock prices continue to show strength, new money has a hard time finding an entry point into MLPs.  In that environment, dips get bought sooner than before.  Does that mean we won’t have a 2% down day this year at all?  I guess it’s possible, but it would be a first for the MLP Index.  On the other hand, we probably won’t see 26 such days in a single year any time soon.
Winners & Losers
Each of the top 5 performing MLPs this week is not a member of the Alerian MLP Index, which may have helped them avoid the sector-wide downdraft Friday.  OILT led all MLPs with a 5.3% gain for the week, making it 2 weeks in a row for OILT in the top 5.  TEP’s announcements around distribution growth surprised the market a bit, sending units higher.  There was no other news around the top 5 MLPs.
On the downside, VLP’s strength earlier in the year makes it susceptible to selling at these levels, same with EQM.  None of the bottom five had any company-specific news and each one was from a different MLP sub-sector.
Top5Bottom5_9-12-14
Top5Bottom5_9-12-14_chart
In terms of year to date total returns, SUSP climbed into the top 5, displacing EQM.  OILT leapfrogged TEP into 3rd place, while the bottom 5 saw no changes in ranking or constituents.  Each of the bottom 5 were down for the week.
Top5Bottom5_9-12-14_YTD
Top5Bottom5_9-12-14_YTD_chart
MLP News
A lot happened this week outside of MLPs.  Fall weather has returned to the Northeast, Apple launched a campaign to make smart watches cool and using plastic credit cards uncool, Ray Rice jerseys are no longer fit to wear in public, and Alibaba’s IPO price range makes it likely to be the largest US IPO ever.
In MLP land, on the other hand, not much happened, especially compared with last week’s flurry of pipeline announcements and equity deals.  A preferred offering, two debt deals, one growth project and one tiny acquisition is all there was.
News-of-the-World
Equity

  • Vanguard Natural Resources (VNR) prices public offering of 4.0mm series C preferred units at $25.00/unit, raising $100mm in gross proceeds (press release)
    • Cumulative redeemable perpetual preferred units with a 7.75% coupon
  • Scorpio Tankers, Inc. and International Paper Company are (separately) exploring MLP IPOs (Bloomberg)

Debt

  • Buckeye Partners (BPL) prices $600mm of senior notes (press release)
    • $300mm worth of 4.35% senior notes due 2024 at 99.825% of par
    • $300mm worth of 5.6% senior notes due 2044 at 99.876% of par
  • Dynagas LNG (DLNG) prices $250mm of 6.25% senior notes due 2019 (press release)

M&A / Growth Projects

  • Sprague Resources (SRLP) announces $22mm acquisition of natural gas and electricity marketing business for $22mm from New Jersey-based Metromedia Gas & Power, Inc. (press release)
  • Boardwalk Pipeline (BWP) announces open season for natural gas transportation project to serve Freeport LNG’s planned liquefaction terminal (press release)
    • Gulf South Pipeline, a subsidiary of BWP, has entered into a 20-year firm transportation agreement with shippers to transport 1.4 bcf/d of natural gas to serve the first two trains of the Freeport LNG terminal
    • Gulf South will construct a 65-mile pipeline supply header to serve the LNG terminal
    • Open season is seeking binding commitments for additional capacity above 1.4 bcf/d
    • Expected to be in-service by 2018

Other MLP News

  • Alerian announces Hi-Crush Partners (HCLP) to replace Martin Midstream (MMLP) in the Alerian MLP Index (press release)
    • MMLP has roughly a 0.37% weight in the index right now, so not a huge change, but this is just the beginning of a series of changes coming to the MLP Index in the next 6 months once the KMI/KMP/EPB and WPZ/ACMP deals close
    • Alerian made no changes to the Alerian MLP Infrastructure Index that is tracked by the largest sector ETF
  • Tallgrass Energy (TEP) announces intent to increase the next 2 quarterly distribution/unit to result in aggregate distribution increase of $0.40/unit on an annualized basis (press release)
    • Announcement was part of press release announcing close of acquisition of 33% interest in Pony Express Pipeline, LLC for $600mm total consideration

Industry

  • The US Department of Energy (DOE) announces final approval of Sempra Energy’s Cameron LNG facility for shipments to non-FTA countries (press release)
    • $10bn project is expected to commence operations in 2018
    • First final authorizations for non-FTA countries since 2012 when Cheniere Energy’s Sabine Pass received DOE clearance
  • Larry Summers outlines the case for crude oil exports: “I don’t understand the opposition.” (Fuel Fix)
  • 17% increase in US exports of refined products year over year, according to EIA, driven by Gulf Coast refinery output (Fuel Fix)
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