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July 11, 2015

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Week Thoughts: MLPs Off the Lows!

MLPs defied falling oil prices and rising rates to finish this week higher than last week.  The Alerian MLP Index ended its 7 week negative streak with a bounce this week, despite dual headwinds of falling oil prices and rising interest rates.  The bounce comes just in time for distribution and earnings season to kick off next week, raising hope for follow through based on MLPs showing that cash flows are more stable than stock price action would imply.
Weekly Review_7-10
Fears over demand weakness from China and Greece fallout seem to be less important factors to oil’s recent decline than supply, which globally still faces headwinds.  U.S. supply continues to level off, but oil in storage has grown the last two weeks.  The Iran trade deal has the potential to unleash another significant OPEC member’s oil onto the global market, adding to already maxed out supply from others in OPEC.
Poll Question Recap
Last week, we asked readers to predict where MLPs will finish 2015 after the worst first half in the sector’s history.  There were 3 choices: lower from here, slightly higher from here and much higher from here.  The runaway winner at 67% of respondents was that MLPs would finish higher than the June 30th closing price (-11.0% return YTD), but still below 0.0% total return for 2015 overall.  21% of respondents were expecting a large rally that would see MLP total returns finish 2015 positive overall, and just 11% expected MLPs to continue their downtrend lower from here.
Given that readers of an MLP blog are likely invested in or are in some way involved with the MLP sector, it’s no surprise that optimism would outweigh pessimism.  If enough of those readers put their money where their mouse clicks are, maybe positive MLP performance becomes self-fulfilling.  My sense is that investors not currently invested MLPs need to notice value in MLPs and flow some of their funds into or back into the sector to get a sustained rally from here.
Poll Question: Pick Your Poison
With broad macro volatility from Greece and China issues subsiding somewhat late in the week, expect broader market focus to return to when and how fast U.S. interest rates rise from here.  I read several research reports published this week on which MLP categories outperformed in a rising rate environment.  Generally, higher growth, lower yielding MLPs have outperformed in the past, based on their growth visibility.
The counter to that is a 50 basis points backup in yield for an MLP yielding 2.0% is much more impactful to stock price than 50 basis points backup for a 7.0% yielding MLP.  This week’s question puts the decision of which is better to own on you (note: email subscribers can click through to to see and participate in the poll question).
Sorry, there are no polls available at the moment.
If all MLP yields were to increase equally over the next 12 months by 100 basis points, then the obvious choice is to own the highest yielding MLP (see math below).  However, if you believe some level of growth premium will remain even in a rising rate environment, it makes sense to bet on growth.
Pick you poison
Like with most things, the right answer is probably somewhere in the middle, because the highest-yielding MLPs tend to have cash flow issues that led to the higher yields, and the lowest yielders have much higher sensitivity to yield changes.
Winners & Losers
LGCY’s acquisition and development company agreement with TPG drove it from worst performing last week to best performing this week.  WLKP made it two straight weeks in the top 5.  Small cap G&P MLPs AZUR and SXE shot higher as investors started to bid up G&P names across the sector this week.  On the downside, MLPs with coal exposure, sand exposure and E&P exposure continue to get crushed.
No changes among the top 5 constituents this week, but we do have a new YTD leader in DKL.  On the downside, FELP’s terrible weak put the coal MLP in the bottom 5 along with other coal-exposed MLPs NRP and ARLP.
GP Holding Companies
GPs underperformed the broader MLP market this week, with no GP gaining more than 2%.  ATLS and EXH continue to fall.  PAGP led the way after a few rough weeks, and seemed to trade better after its dividend announcement.
News of the (MLP) World
Upstream MLPs finalized equity partnerships with private equity firms for development and acquisition vehicles this week, and there were a few other minor announcements, but nothing major announced this week.  Also, the ETE/WMB saga looks like it is no closer to resolution.  No capital markets activity this week probably helped MLP performance a bit.
Capital Markets

  • None

M&A / Growth Projects

  • Enterprise Products (EPD) announced propylene pipeline conversions and expansions to serve petrochemical customers in South Texas (press release)
    • EPD did not disclose the expected capital outlay for these growth projects
  • Williams Partners (WPZ) announced that its Transco subsidiary filed an application with FERC for its New York Bay Expansion Project to deliver natural gas to NYC in 2017/2018 (press release)
  • Legacy Reserves (LGCY) announced $440mm acquisition of E&P and midstream assets in East Texas from Anadarko and Western Gas (press release)
    • Upstream assets consist of gas production of 70mmcf/d and reserves of 420 bcf on 89,000 net acres
    • Midstream assets consist of 567 miles of gathering lines and a 502 mmcf/d processing 1plant (20% of volumes come from third parties)
    • LGCY also announced agreement with TPG Special Situations Partners to fund development of certain LGCY Permian acreage (press release)
  • Alliance Resource (ARLP) announced acquisition of remaining White Oak Equity interests for $50mm (press release)
    • ARLP estimates cost synergies by operating the White Oak mine of $12-18mm annually, beginning next year


  • Linn Energy (LINE) announced finalization of strategic partnerships:
    • With Quantum Energy for $1bn of funding into “AcqCo” to pursue selected future acquisitions (press release)
    • With GSO Capital Partners for $500mm of funding into “DrillCo” to fund oil andnatural gas development (press release)
  • Exterran Partners (EXLP) will change its name to Archrock Partners following spin off of non-U.S. business lines from parent company (press release)
  • Energy Transfer Equity (ETE) reiterated its bid for WMB, despite not participating in whatever sales process is being run to sell WMB (press release)
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