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September 5, 2011

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Week Thoughts: MLPs Rise Until Jobs Don't

For the week, MLPs were up 1.9%, outpacing the broader markets, in a week that saw gold and treasury prices rise sharply again.  The 10-year treasury interest rate traded below 2% again on Friday following the terrible jobs report.  MLPs finished August on a very strong note, closing 12% higher than the August 8th low.  For all of August, MLPs were down 1.9% on a price basis, down 1.1% including distributions.  YTD, MLPs have produced total return of 2.2% through the end of August, and yield around 6.6% currently.
MLP tax fears seem to have subsided, replaced by proof of a faltering economy, and a failure of the U.S. to make a dent in the output gap created with the 2008 recession.  Expect MLPs to trade inline with the broader markets in the coming months as volatility tends to breed correlation these days.

Gold and treasuries out-performance was foretold back in 2001 by Eric Janszen at  His latest letter came out this week, titled “Illusion of Recovery – Part I: Print and pray has officially failed”.  In it, he discusses what we’re seeing in gold and treasuries today.  Basically, the US$ based international reserve system started to breakdown in 2001.  Since then, the number of countries that are buying gold has increased (to include trade partners like Mexico recently) as more and more of them have lost faith in the global US$ treasury reserve currency system.  For now, both bets remain safe havens, but many are betting that at some point we have a U.S. bond crisis of some kind.  An excerpt from Janszen is below, but you can read more here:

The major gold buying countries are not necessarily allied with each other but rather are aligned against the US and NATO policies, such as in the Middle East. It is no coincidence that the main critics of US and NATO policy in Libya — China, Russia, India, and Venezuela — are also the lead players in the shift from US$ Treasury reserve system to gold. The addition of Saudi Arabia, Thailand, Singapore, and recently North Korea and Mexico as major gold buyers indicates a broader disaffection with a system that is proving unstable and politically untenable even to countries with strong geopolitical ties to the US.

In contrast to investment banking strategists quoted in Barrons calling for the markets to finish 2011 higher and for US GDP to grow at a rate significantly faster than the first half of 2011, Janszen calls for the market to close 2011 below 1000, and for gold to reach $2200 per ounce in early 2012.
For MLPs, a stagnating economy and falling stock market would not be catastrophic in the short term.  If the economy continues to falter, MLPs should generally be ok, but forecasts of accelerated distribution growth are likely optimistic.  Commodity prices may come down and volume may fall further, but MLPs are generally less levered than they were in 2008, and have been more conservative with distribution growth of late, choosing to build up coverage ratios.  So, operationally MLPs should be able to weather a flat economy without cutting distributions.
In the event of a large stock market decline, MLPs will decline as well, but should outperform in the near term, buoyed by yield chasing investors.  However, if foreign buyers of US treasuries continue to dry up, interest rates would have to rise at some point, hurting MLP valuations as yield repriced higher.
Top and Bottom 5 Performers
$GEL and $NKA were the biggest positive movers this week, each up more than 9%.  NKA had led the correction down after a slew of bad data points and earnings releases took down all the natural gas storage players, so like a rubber band, it bounced back this week, but remains 18.4% below its price at the end of July and 39.3% off its 2011 high in early April.  $CPLP continued to struggle this week, and is now down more than 37% YTD.  Other losers this week, $SPH, $GLP, $CQP and $NMM, are all down more than 15% for the year so far, but are off the lows! (as they say on CNBC).

MLPs were light on announcements this week again, but there was some news:

  • 9/1 – Magellan Midstream ($MMP) announced a $275mm project to reverse and convert a portion of its Houston-to-El Paso pipeline.  The pipeline currently transports refined products, but will be converted to transport 135,000 bpd of crude from West Texas to MMP’s East Houston terminal. Expected to be in service by mid-2013.  (Yahoo Finance)
  • 8/31 – Williams Partners ($WPZ) announced FERC approval for a proposed expansion of its Transco natural gas pipeline by 225,000 dekatherms of capacity to meet demand in the Southeast region.  The project will cost approximately $217 mm, and will be completed in 2 phases in 2012 and 2013. (Yahoo Finance)
  • 8/29 – Legacy Reserves ($LGCY) announced it was increasing its 2011 development capital budget to $60 mm from $52 mm for this year. (Yahoo Finance)
  • 8/29 – Atlas Pipeline Partners ($APL) announced an agreement with DCP Midstream to sell DCP’s natural gas liquids (NGLs) production from APL’s facilities in Oklahoma and Texas. (Yahoo Finance)

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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