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December 27, 2015

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Week Thoughts: MLPs Mop Up in Garbage Time

MLPs rallied hard this week, finishing up 13.8% in just 3.5 days, the 3rd best week ever for MLPs and best week since 2008. But even with 14% in 2 weeks, MLPs are still down around 3% for December so far and down 32.6% for 2015 so far.
Weekly Review_12-25-15
Oneok (OKS) guidance on Monday sparked a relief/short-covering rally that was met with less selling pressure than we’ve grown accustomed to. Also, unlike other brief rallies since early November, this one got help from an oil price rally and a positive broad stock market backdrop (S&P 500 +2.8%). The combination of those factors seemed to inspire renewed confidence in distribution sustainability for a host of MLPs yielding greater than 10%. There is also clearly some early rotation happening as investors look to major 2015 losers for potential winners in 2016. Basically, all the bullish stars aligned this week.
We Can Build on This
Action this week reminded me of a basketball game whose outcome has been decided beyond all doubt, but the trailing team makes a late run to make it seem like the loss wasn’t so bad. I love to play basketball but wasn’t endowed with the requisite physical gifts to be a very good player in high school. So I am quite familiar with the concept of garbage time.
Coaches love to see teams play with pride despite an inevitable loss, thinking they can build on it for future games. I know from experience that pride can only get you so far when it comes to sports and investing. Over the next year, the MLP business model will be tested, but we should have an idea by the end of it whether they have the goods or not.
Historical Context
2015 continues to rewrite the MLP record books. The huge rally this week ranks third all time. See below for the top 10 weeks ever. The others in the top 5 were snapbacks during the most extreme periods of volatility during the global financial crisis.
Best Weeks_12-25-15
Based on history, what can we expect for the last remaining days of 2016? As shown in the chart below, there usually is not much action between Christmas Eve and year end, with the exception of the end of 2008. If you recall, that late 2008 rally was followed up by the strongest year ever for MLPs in 2009. 2008 was the only year comparable to 2015’s MLP decline.
Holiday Returns
On that note, barring a collapse next week, 2015 won’t be the worst ever for MLPs (2008 at 36.9% would retain the crown), but it will be the worst relative to the S&P 500.
Winners & Losers
Generally when commodity prices rally hard, the upstream MLPs dominate the weekly top 5. But 4 of the top 5 MLPs this week were midstream MLPs, a testament to how dislocated midstream MLP valuations had become. AZUR was up 113.9% this week and still yields 86% based on the 3Q distribution. Other small cap gathering & processing MLPs had massive gains as well, after being crushed the last few weeks. Only two MLPs were negative this week.
Top5Bottom5_12-25-15
Top5Bottom5_12-25-15_chart
Heading into the final 4 trading days of the year, VLP has a substantial lead on the field, while the volatility among the bottom 5 continues, with AZUR and MEMP both escaping the bottom 5 after huge weeks.
Top5Bottom5_12-25-15_YTD
Top5Bottom5_12-25-15_YTD_chart
General Partner Holding Companies
GPs were all positive, but underperformed MLPs as a group. Losers from last week flipped to the top 5 this week, and the best performing GPs were at the bottom of the group this week.
Top5Bottom5GPs_12-25-15
Top5Bottom5GPs_12-25-15_chart
News of the (MLP) World
As you would expect, the MLP press releases have slowed to a trickle entering the holidays. There were a few notables. Variable distribution refinery MLP Northern Tier (NTI) announced an agreement to merge with its general partner Western Refining, Inc. (WNR), and that seems to have some positive read through for subsidiary MLP WNRL. Also, Rice Energy announced private equity support for its midstream development. And finally, while the impact from oil exports is not likely a game changer for MLP capex (as noted by us [link to whitepaper] and others), EPD announced an agreement to export its first cargo of oil from its terminal at the Houston Ship Channel. EPD continues to be at the forefront of liquids exports.
M&A / Growth Projects

  • Western Refining (WNR) and Northern Tier Energy (NTI) announced agreement to merge (press release)
  • Rice Energy announced investment into Rice Midstream Holdings by an energy infrastructure fund of up to $500mm (press release)

Other

  • Enterprise Products (EPD) announced agreement for first oil export cargo (press release)

 

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