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December 7, 2014

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Week Thoughts: MLPs Processing a Crude Reality

MLPs recorded their second straight week of declines, with the Alerian MLP Index (AMZ) down 1.5% this week after last week’s 6.0% decline.  Following a 4.4% washout Monday, MLPs bounced higher in each of the next three trading sessions to claw back to flat for the week, but then reversed on Friday when the index was down 1.6%.  Despite the drama, the MLP Index remains 6.4% higher on a total return basis than its 10/14 low.
Weekly MLP Review_12-5
Volatility in both directions should continue at least through the end of the year as investors balance the new commodity price reality with company-specific exposure to that new reality.  Each passing week of declining commodity prices forces ongoing iterations of the re-evaluation process.  This week, many MLPs are presenting at the Wells Fargo conference.  It will be very interesting to see how they address the commodity issue, beyond saying that producers haven’t slowed activity in their regions so far.
The Equal Weight MLP Index is down 5.7% on a price basis this year, but is still up 0.5% for the year on a total return basis, nearly 900 basis points behind AMZ.  AMZ has never beaten its equal weight cousin by more than 800 basis points.  Given the wide performance disparity among growth MLPs vs. commodity sensitive MLPs, it’s no surprise that we’d set that record this year.
Commodity Prices Fall Further
Oil prices continue to dominate the conversation, but milder weather contributed to a bearish natural gas storage report and a 7.2% decline this week, a much bigger decline than oil this week.  Propane and Ethane didn’t trade last Friday, so the big week over week drops were largely a catch up from last Friday’s 10%+ oil price drop.  Ethane prices reached a multi-year low of $0.15/gallon on Wednesday, and current ethane price is much lower than its lowest point during the financial crisis in 2008.  Propane hasn’t reached financial crisis levels yet, but it set a 52-week low this week as well.
There are other factors at play in the MLP space other than oil price.  Interest rates rose this week, which sent utilities lower this week.  A good jobs report helped to confirm the U.S. economic story.  Also, the US Dollar is dominating the world currency market, which doesn’t help oil prices.  See the chart below for what looks like strong inverse correlation that OPEC can’t do much about.
Winners & Losers
RIGP bounced hard this week, up 20.4%, but it remains 14.2% below its July 31 IPO price.  RIGP’s IPO could not have been timed better (WTI oil had just crossed below $100/bbl).  Two other 2014 IPOs (DM and GLOP) were the next best performers.  GLOP held an analyst day this week, where it outlined its plan to grow the combined fleet of GLOP and its sponsor to 40 vessels by the end of 2017.
Each of the bottom 5 MLPs this week have substantial commodity price exposure in their businesses.  Not one of them had any news, which generally is necessary to drive 20%+ negative movements, especially after several of them were down big last week.
MCEP is down 45% in two weeks, and is the only repeat member of the bottom 5.  GLOP led all MLPs last week and was second best performer this week.
As MLPs limp into the final weeks of the year, the divergence among MLP performance is as wide as it has ever been.  Choosing the right MLPs among the 120+ names out there has really matter.  This week, DM popped back into the top 5, while each one of the bottom 5 declined this week.
News of the (MLP) World
There were a few brave MLPs that issued equity this week.  Perhaps at some point before the end of the year, one of the 13 MLP IPOs that have filed will be brave enough to try to get an IPO done.  Since the Thanksgiving Massacre of last Friday and Monday, KMI and OKS have issued 2015 guidance, each was upbeat about their growth prospects even in a $65/barrel oil price (and <$0.60/gallon NGL price) world.
OKS is counting on significantly higher than $0.60/gallon NGL price to achieve its guidance, but even taken with a grain of salt, OKS guidance implies MLP businesses are strong enough to endure a slowdown in upstream activity in 2015.  Resilience and stability in the face of turmoil is what you would expect from MLPs, despite the market’s increasing focus on growth in recent years.

  • MPLX priced public offering of 3.0mm units at $66.68/unit, raising $200.0mm in gross proceeds (press release)
    • Overnight offering, priced at 4.0% discount to prior close
  • Global Partners (GLP) priced public offering of 3.56mm units at $40.24/unit, raising $143.3mm in gross proceeds (press release)
    • Overnight offering, priced at 3.9% discount to prior close

M&A / Growth Projects

  • PBF Logsitics (PBFX) announced $150mm drop-down acquisition (press release)
    • PBFX to acquire the Toledo Storage Facility, which consists of 3.9mm barrels of feedstock and product storage capacity at PBF Energy’s Toledo Refinery
    • Sponsor PBF will enter into a 10-year terminalling agreement with minimum volume commitments
    • PBFX expects $15.1mm of annual EBITDA (10.0x multiple)
    • PBFX will borrow $105mm, use $30mm of cash and issue $15mm of units to PBF to fund the transaction
  • Enbridge (ENB) announced evaluation of drop-down strategy, provided clarity on its plans with its Canadian income fund subsidiary, and increased payout ratio (press release)
  • Constitution Pipeline Company (41% owned by Williams Partners) received approval for construction of the Constitution Pipeline (press release)
    • Constitution is a 124-mile, 30-inch diameter pipeline designed to transport natural gas from supply areas in northeast Pennsylvania to interconnects with existing pipelines in Southern New York
    • Expected to be in-service by the winter of 2015
  • NGL Energy (NGL) disclosed purchase price of Grand Mesa pipeline stake (Form 8-K)
    • $310mm in cash is what NGL agreed to pay for the remaining 50% stake in the constructed Grand Mesa Pipeline, scheduled to be in-service in Q4 2016
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