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October 3, 2011

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Week Thoughts: Moral Victory - MLPs Outerperform in Losing Quarter

I’ll be brief with this post, given that I’ve been travelling, but I wanted to at least provide some wrap up numbers on the quarter for MLPs and where we’re at for the year.  MLPs were down 4.2% in September, down 8.8% for the third quarter, 6.9% including distributions.  With the major equity indexes each off more than 12% for the quarter, MLPs have held up well, particularly from mid-August through the end of the quarter. Last week had some pretty volatile moves up and down, but for the week finished almost flat.  The S&P500 was down slightly, gold was down a bit more, and interest rates were up 12 basis points.  MLPs are doing significantly better than the equity indexes on a year to date and since April 28th basis, but as the saying goes, you can’t eat relative performance…

For the third quarter, of the 65 MLPs that I track, $EVEP was by far the biggest winner, with 37.3% total return in the quarter, as the Utica shale play is showing positive signs early on.  $OILT, which went public in July, followed at 12.7%.  The large cap leader was $OKS, which announced increased guidance this week, which helped it gain 8.8% this week, and 10.7% for the quarter.  Of the 52 MLPs that had negative total returns for the quarter, coal name $OXF was the worst, with -31.2%.  Other coal MLPs, natural gas storage MLPs, and propane MLPs dominate the bottom 20 performers this quarter.  Of the large cap MLPs, $NS (-16.0%) and $ETP (-14.3%), had the largest losses.

For the year to date, EVEP is once again at the top with 88.4% total return, $APL (26.4%) is a distant second.  3 IPOs are the in the top 10 for the year ($GMLP, $TLLP and $OILT).  Drop down stories, $WPZ, $EPB, $DPM and $EPB have also held up well.   The bottom 10 are dominated again by natural gas storage, propane, shipping and coal MLPs.  $NS is once again the lowest performing of the larger MLPs at -20.7% for the year.

GP Holdco’s had a rough quarter as well.  Just 1 out of 7 had positive total return for the quarter, with $ETE at the bottom of the list at -20%.

For the year, GP Holdco’s are still outperforming regular MLPs, but its been a mixed bag, with $XTXI and $ATLS way outperforming, as their previously distressed MLPs fight their way back.

For the next quarter, I think the best approach is to take a basket that includes (1) high growth midstream MLPs with low yields, (2) some large-cap fallen stars that have been beaten down and offer very high relative yields, and (3) some GP Holdco exposure.  That barbell approach of low yield from the growth MLPs and GPs combined with high yield from the fallen stars (which may see yield compression this quarter), should provide a higher yield than the sector overall, with significant upside.

  • Capital Products Partners ($CPLP) – announces completion of acquisition of Crude Carriers Corp.  and refinancing of the Crude Carriers Corp. Outstanding debt from its existing $350 mm facility. (Press Release).
  • Inergy ($NRGY) announces non-binding open season for North-South Project II capacity expansion and extension. (Press Release).
  • Enterprise Products Partners ($EPD) and Enbridge, Inc. ($ENB) announce plans to jointly develop a crude oil pipeline from Cushing to Gulf Coast. (Press Release).
  • ONEOK Partners announces higher guidance for 2012.  (Press Release).
  • Ferrellgas announces earnings (Press Release).
  • EPD announces updates to its optimization projects at EPD’s Neptune natural gas processing facility. (Press Release)

Upgrades / Downgrades Last Week:

  • $MWE upgraded by Ladenburg Thalman from neutral to Buy (9/29)
  • $GLP downgraded by BofA Merrill Lynch from Buy to Neutral (9/28)
  • $TLP upgraded by BofA Merrill Lynch from Neutral to Buy (9/28)
  • $HEP upgraded by UBS from Neutral to Buy (9/27)
  • $GEL upgraded by UBS from Neutral to Buy (9/27)

Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.

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