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December 11, 2016

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Week Thoughts: MLPs Lag Despite Right Stuff

MLPs rallied this week, but underperformed the S&P 500 (more on that below).  Winter showed up in force, sending front month natural gas to its highest level in years. Interest rates rose a bit and may have held MLPs back, but doesn’t seem like it when utilities nearly kept pace with the broad market.
PEOTUS Donald Trump is doing his best to get MLPs going.  He appointed pro-fossil fuel Oklahoma AG Scott Pruitt head of EPA.  And CEO of ExxonMobil Rex Tillerson emerged this weekend as Trump’s leading candidate for Secretary of State.  Its almost as if Trump was trying to find someone that would have more conflicts of interest than he does.
Other oil producing nations are also doing their best to bring the market into balance and raise oil prices.  This weekend, non-OPEC nations agreed to reduce production in line with the agrement OPEC announced on 11/30.
In a stunning shift vs. a few months ago, the regulatory and commodity price backdrop is suddenly quite positive for MLPs, even if MLP prices have yet to reflect it.
MLPs and Mr. Market: Down the Stretch they Come
MLPs dominated the S&P 500 for more than a decade before 2012.  For each of the last 4 years, the S&P 500 has crushed the MLP Index.  Interestingly, as of Friday, the total return of the S&P 500 and the MLP Index are exactly the same so far in 2016.
Momentum is on the S&P 500’s side, and if this week’s action carries on for the next 14 trading days, S&P 500 will win for a 5th straight year.  But, no matter who wins, the gap will be more narrow than any year since 2008.
The Alerian 12
This week, the last of the original Astronauts, the “Mercury Seven”, died at age 95.  John Glenn was the oldest of the 7 when the group first got together, but outlasted the others.  He led a remarkably full life of public service before and after he was an astronaut.  The epic 1983 film The Right Stuff gives you a sense of the extreme celebrity of those first astronauts.
Next week, one of the original 12 MLPs in the Alerian MLP Index will be removed. Ferrellgas (FGP) went public in 1994, and since the start of the MLP Index’s data it had been in the index for every quarter since the end of 1995. Of the original 12 MLPs, 1 if FGP, 7 no longer exist, and 4 remain in the index.  They are APU, BPL, EEP (formerly Lakehead Pipeline Partners) and OKS (formerly Northern Border Partners) remain.
Kinder Morgan Energy Partners (known then as Enron Liquids) was on the original list before being acquired in 2014, while two others exist within other MLPs today: TEPPCO within Enterprise and Kaneb Pipe Line within NuStar).
Poll Question Recap
Last week, my frustration came through a bit with the poll question asking readers why they weren’t buying MLPs.  MLPs have at this point underperformed the S&P 500 since the election and the OPEC agreement to cut production, both clear pro MLP events.
It seems like a lot of you are in the same frustrated camp, as evidenced by the winning answer at 35%: “I’m buying MLPs, there are just too many of them to move the needle”.  This isn’t a surprise.  Folks who would read a website dedicated to MLPs are not the problem, because they probably do buy MLPs.  The problem is MLPs aren’t attracting the incremental equity investor right now.
The other responses to the poll question focused on reasons why investors might not allocate to MLPs with their incremental investment dollar:  commodity price fear (22%,), interest rates (21%), preference for higher beta energy stocks (14%), and fear of tax reform (8%).
For the incremental new buyer of the sector, late December is probably not the ideal time to buy MLPs, because you’d get K-1s and tax filing complications for just a few days at the end of the year.  It would be administratively easier to wait a few weeks. Its part of what has made January one of the best average return months for the MLP Index over the years.
Winners & Losers
USAC’s equity deal landed it at the bottom of the sector this week.  WPZ didn’t get a bounce from its investor meetings this week.  Other, small cap MLPs did get a bounce as institutional investors were reminded of their existing in some cases at the Wells Fargo conference in NYC.
FGP went from worst to almost first.
Year to Date Leaderboard
There is still some jockeying for position among the winners for the year overall.  AMID jumped a few spots to 3rd place and RIGP replaced USDP in 5th place.  The bottom 5 stayed remarkably consistent, with several hardly budging this week.
G.P. Holding Companies and Midstream Corporations
GPs and corporations underperformed MLPs this week.  ETE went from bottom 5 to top 5, SEMG and AHGP made return trips to the top 5, while KMI repeated in the bottom 5.
News of the (MLP) World
Capital markets activity should slow in the next few weeks, but there may be room for another equity deal(s) next week.  There is also still time for some more DAPL shenanigans, corporate M&A announcements, and 2017 guidance releases.
Capital Markets

  • USA Compression (USAC) priced public offering of 4.5mm units at $16.25/unit, raising $73.1mm in gross proceeds (press release)
    • Overnight offering, priced at 9.8% discount to prior closing price
  • Cheniere Energy (LNG) priced upsized $1.5bn of 5.875% senior secured notes due 2025 at par (press release)
    • Offering upsized from $1bn
    • Proceeds to be used to pre-pay Cheniere Corpus Christi Holdings, LLC credit facilities
  • Several large midstream companies or MLPs filed shelf registrations in anticipation of equity at some point in the future (most likely on ATMs for the U.S. ones)
    • Plains GP Holdings (PAGP) registered $1bn of primary Class A Shares via form S-3 (filing)
    • Magellan Midstream (MMP) registered $750mm of primary common units via form S-3 (filing)
    • TransCanada (TRP) filed $1.5bn mixed equity shelf (filing)

Growth Projects / M&A

  • Magellan Midstream (MMP) announced intent to develop $320mm of Houston Gulf Coast crude oil and condensate terminal and pipeline infrastructure (press release)
    • Seabrook Logistics, LLC (50% owned by MMP, 50% by LBC Tank Terminals, LLC) will construct 1.7mm barrels of additional oil and condensate storage tanks for $250mm
    • MMP will invest an additional $70mm to develop additional pipeline infrastructure in the area to support and connect the terminal to MMP’s other Houston-area assets
  • Front page news all over the nation early this week was that the Dakota Access Pipeline was formally denied its easement by the Army Corp of Engineers
    • Energy Transfer and Sunoco Logistics responded with a press release venting its frustration regarding the political nature of the denial despite ETP having “done nothing but play by the rules” (press release)
  • TransCanada (TRP) announced its subsidiary NOVA Gas Transmission (NGTL) will move forward with Saddle West Project to expand the NGTL system by 355 mmcf/d (press release)
    • The $655mm project is expected to be in-service in 2019, supported by incremental firm service contracts


  • Alerian announced quarterly changes to its series of indexes (press release)
    • Ferrellgas (FGP) is to be removed from the Alerian MLP Index with next week’s rebalance, leaving the benchmark with just 43 stocks
    • FGP has declined more than 60% since the last rebalance of the AMZ and has cut its distribution 80%
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