December 3, 2017
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After plumbing fresh 2017 depths each of the first three days of the week, MLPs bounced hard Thursday with some follow-through Friday to finish the week up 3.0%. It was the best week for MLPs since the late June when oil prices bounced from the low $40s.
Overhang from seasonal technical factors, some uncertainty regarding FERC and tax reform weighed on MLPs early in the week. The bounce had no single catalyst. Rather it seemed to be the combination of:
Oil wasn’t the driver this week, but at more than $58/bbl (35%+ up since the June low) and supported by global OPEC and non-OPEC oil producers around the world, oil prices remain supportive of production growth and MLP volume growth. In addition, propane prices are at their highest point since October 2014, supportive of processing economics and NGL infrastructure.
Given the fundamental backdrop, strong demand for MLP preferred equity and significant underperformance of MLPs this year, MLP investors were despondent and management teams were frustrated at the Jefferies energy conference I attended in Houston this week.
Next week will include some preliminary 2018 expectations from the likes of KMI and WES, plus some producers presenting at the Wells Fargo energy conference. In addition, ANDX and ENB/EEP/SEP will hold analyst days. Those expectations from management teams are likely to be positive relative to current investor sentiment, given the fundamental backdrop and likely improved business activity since this time last year.
“Russ, we checked every bulb, didn’t we?”
Immediately after Thanksgiving, like many red-blooded Americans, I race to put up Christmas decorations outside my house, so I don’t get caught having to do it when its literally freezing outside in December. During that process, inevitably some lights don’t work, and I have to painstakingly go through each light to make sure the bulbs and fuses are fresh, and sometimes they still don’t work.
MLP investors have been like Clark Griswold trying to get his Christmas lights to work in the 1989 class Christmas Vacation. After checking each one of the 25,000 bulbs covering the entire house, frustration mounted to the point where Clark was wrestling with a plastic Santa Claus. Still, they wouldn’t light up, until his wife flipped a switch in the utility room and suddenly lights blared.
MLP investors that saw oil prices crush the MLP sector have been miffed that improved oil prices have not turned on a rally in MLPs. There are structural, technical, competitive and financial reasons MLPs have traded poorly, but for this week at least, a switch was flipped and MLPs finally turned on.
Status Update
The last day of November saved MLPs from a third 4% decline in 4 months. Instead, MLPs finished down 1.4% including distributions. MLPs still have some catching up to do to avoid a 3rd straight negative quarter (-5.4% through 11/30), which is possible (the highest return ever for a December was 2009 at 6.6%). Its unlikely MLPs will climb all the way back to even before the end of the year, but finishing strong would be a welcome relief.
We’ve now passed through the seasonally weak period for MLPs, and have entered the seasonally positive period for MLPs. November and May have been the worst months for MLPs over the years. December and especially January have been among the best months for MLPs historically for obvious reasons as post distribution capture and tax loss season fade and hope emerges as the calendar turns.
The chart below lists all the months the MLP Index has declined 3%+ over the last 13 years. This year, we added another 3 such months, which has been painful. But compared with 2015 and 2008, 2017 selloff has been relatively orderly, with no 5% down days or months.
Winners & Losers
There were some serious pops among MLPs this week. Producer-sponsored G&P MLPs HESM and AM rallied sharply on no news. HESM IR did send out Hess trucks to some of us this week, and that may have helped remind folks HESM exists. EEP rallied 12.4% on better than feared 2018 guidance ahead of the Enbridge analyst day next week. NS rallied after pricing a preferred offering early in the week and after a painful few months of price action. SHLX’s drop-down that came earlier and cheaper than expectations, helped it rally.
OMP went from top 3 last week to bottom 3 this week. PAA and EPD were under pressure late last week and early this week on the FERC marketing ruling, but rallied after EPD and PAA indicated the ruling does not impact its business.
General Partners and Midstream Corporations
The median return of GPs and Midstream Corps underperformed the MLP Index. High beta names SEMG and ENLC led the way, but WMB had a strong week as well. Only one of the group was negative. Notable that NSH didn’t rally much on NS’s big week.
WMB and ENLC made it two straight weeks among the top 3 gainers in the group. On a YTD basis, only two names in the group are positive and the median return matches the return of the MLP Index so far this year.
Canadian Midstream Corporations
Mixed performance in Canada this week, amid a flurry of announcements. TransCanada affirmed its dividend growth outlook through 2020, but some of the details did not sit well with the market, and TRP was near the bottom for a second straight week. Enbridge’s analyst day preview and equity deal was met with much more enthusiasm. Keyera’s equity offering made it difficult for it to ride the positive midstream wave late in the week.
ENB’s solid week wasn’t enough to pull it from the bottom of the group for the year so far. There remains a wide gap between the best 3 performers (Pembina, KML, TRP) and the rest.
News of the (MLP) World
Midstream corporations and MLPs raised $3.5bn in combined external equity financing this week, including $1.1bn in preferred offerings ($300mm in Canada) and $2.4bn in common shares of Canadian corporations. In addition, ENB announced proposal to eliminate SEP’s IDRs, which is the 7th such IDR elimination transaction to be announced in 2017. Increasingly, IDRs have become (like lightsabers) an elegant relic from a more civilized age in MLP land, an age when cash flow was plentiful such that no one complained much about structure.
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