May 1, 2016
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MLPs held gains from last week, through a big round of distribution ex-dates and the initial round of MLP earnings, such that the total return of the MLP Index was positive for a 5th straight week. Oil grinded higher on weaker dollar and indications of ongoing activity declines driving production lower, even as oil in inventory continues to be volatile.
Apple’s weak quarter hurt broader market sentiment and helped send the S&P 500 lower. MLPs are outperforming the S&P 500 so far in 2016, which prior to 2013 was very routine for MLPs to do. Earnings were ok this week, but expect volatility in the coming weeks as less diverse gathering & processing MLPs report.
The Next Big Thing is Here?
This week’s NFL draft provided new hope for every NFL team that their fortunes might improve in the future. Forgotten briefly are the disappointments and failures of the regular season or playoffs, the ineptitude of the existing players on the roster, or general disarray. As a fairly new resident of Philadelphia, I’m learning that this selective memory loss occurs annually. Fans like hope, they want to believe things will get better. And sometimes they do.
A similar phenomenon has happened of late in the MLP sector as commodity prices have improved. The high leverage, the promises not kept, the customer bankruptcy risk, the general upheaval for many MLPs has been set aside. As commodity prices rise, the major midstream risks seem to be drifting further from investor consciousness.
The Q&A on this week’s earnings calls focused more on opportunities ahead. NGL margin and volume uplift from improved ethane and propane for MLPs has become a focus. Also, the INGAA report out a few weeks ago put some numbers behind the theoretical infrastructure needs for the next 20 years (and the numbers were still quite large, despite the commodity collapse). So, in this week’s poll question, we lean into the hopeful sentiment and feel out what you believe to be the biggest opportunity.
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Status Update
Historic seasonal strength for MLPs did not disappoint in April. The 11.0% return in April matched the best April ever (2009) and ranks as the 5th best month ever for the MLP Index. April followed the best March ever for the MLP Index, and marks the first consecutive positive months since June 2014.
MLPs climbed back into the green for the year last week, and it was encouraging to see those gains hold this week even as ex-dates came and went. As we look forward to May, distribution seasonality tends to pressure MLPs in May following the payment of distributions. May has been negative for 5 of the last 6 years, including last year’s 3.6% decline, which sparked an unprecedented 5-month decline that saw the index decline 32.8%.
I’ve noted before that a single positive month here and there was nothing to get too excited about, and would be excited when MLPs posted consecutive months. Back to back huge months, following the huge intra-month rally in February confirms that the worst is behind us. There will be negative weeks and months again in the future, but hopefully not a negative streak like those we saw in 2015.
Winners & Losers
AMID was this week’s lottery winner, up 26.5% following a distribution cut and acquisitions. SDLP’s distribution announcement and sponsor’s slightly stabilized liquidity situation helped it rally. RRMS and MEP continued their strong runs in recent weeks. SRLP announced an increased distribution. CPLP’s distribution cut dragged it lower this week. PSXP’s weak earnings landed it in the bottom 5.
MEP landed in the top 5 again this week, and is now up 104% from the bottom on 2/26, and still yields more than 20%.
Despite the big run, MEP remains among the biggest losers of the year. CPLP dropped way back off the pace this week, while SDLP took over the top spot.
General Partner Holding Companies
GPs as a group outperformed the MLP sector. ETE once again was near the top, while SE continued to lag, but this week was joined by WMB as the ETE/WMB merger spread seems to imply a deal is very unlikely to be consummated at this point. EQGP benefitted from strong MLP earnings, TEGP made it two weeks in a row on good earnings and the potential REX acquisition.
News of the (MLP) World
Earnings dominated the sector this week, but there were some very interesting transactions, including more than $1.1bn worth of equity raised and more sponsor-supportive acquisitions.
Financing
M&A / Growth
Distribution Announcements
There were 6 distribution cuts from MLPs this week, 2 of them from AMZ members.