February 23, 2014
Viewed 3126 times
After 6 straight positive weeks that took the Alerian MLP Index on a price basis near its all time high, MLPs were unable to breakout and the index tumbled 1.5% this week. The S&P 500 (-0.1%) continued to gain on MLPs with a second consecutive week of out-performance. Large cap diversified MLPs (that dominate the Alerian MLP Index) were down more than others, as shown in the variance of the MLP Equal Weight Index performance this week. Heading into the final week of February, MLPs are slightly better than flat for the month so far, and slightly better than flat for the year (inclusive of distributions) in a slippery market environment.
Commodity prices were mostly higher, although the spot price for Mt. Belvieu propane was down 13.2% and Permian crude oil price (not pictured below) was also down. Front month natural gas futures spike an amazing 18.6% week over week to close well above $6.00/mmbtu. Weak propane prices and higher natural gas prices combine to generally reduce processing and fractionation margins, but the forward curve suggests that the near-term natural gas spike (which seems to have lasted a while now) will be short lived and will rationalize a bit (maybe from its current downhill ski slope shape to a gentler ski school run) once this irrational winter finally wanes.
Earnings were once again in focus this week, with the Energy Transfer (ETE/ETP/SXL/RGP) and Williams families (WMB/WPZ/ACMP) reporting results for the 4th quarter of 2013. No real surprises among those names. WMB’s Bluegrass Pipeline project was delayed 6-12 months (although not canceled entirely). A lack of bad news proved to be a positive for WMB’s share price, which was up 3.7% on the announcement. WPZ was down, however, perhaps due to pending (and growing) equity financing needs to fund announced projects.
This dramatic bifurcation within the same family of companies highlights the ongoing trend in trading for GP (and incentive distribution rights) holding companies and their underlying MLPs. Sell-side equity research analysts may have done too good a job spreading the gospel of IDRs and total return in recent years, to the point where now trading in public GP holding companies is disconnected with its underlying MLP, and investor focus has shifted away from the base MLP businesses to the parents. The recent price charts of TRGP/NGLS, PAGP/PAA, WMB/WPZ, OKE/OKS, ETE/ETP show the trend much better than I can explain it. One of those is highlighted here. It may be starting to get awkward for MLP management teams that typically have more of their wealth tied up in the GP holding companies than in the MLP. It will be interesting to see if and when the narrative changes for certain equity research analysts from growth back to value. Growth remains king of the hill for now, and GP holding companies have that in spades, as do the drop down MLPs that are leading the sector in returns year to date (like PSXP and VLP).
Update on Risk Poll
Thanks to all who participated in our latest poll a few weeks ago, where I asked what you thought was the single biggest risk to MLP performance over the next 12 months. The results are summarized below. Rising interest rates remain the biggest single concern, although rising rates certainly weren’t insurmountable last year when the US 10-year interest rate was up 127 basis points and MLPs produced great returns.
The second and third most popular risks below, general stock market sell-off and general economic slowdown, are similar in that they are circumstances outside the energy space that could impair MLP performance. Survey data can be like a Rorschach, but what I see in the results is that my readers are bullish on secular energy themes that are driving opportunities for MLP cash flow growth, but remain wary of broad macro-economic factors that may impact MLPs ability to attractively finance that growth. What is less of a concern, based on the above chart, is the possibility of someone crashing the MLP party with tax reform or some other energy legislation that might curtail production.
Winners & Losers
ATLS and APL released 4Q results that were below expectations and also lowered guidance for 2014, which the market did not appreciate, at least until Friday when APL bounced 4.0%, which was enough to escape the bottom 5 list below. GEL reported results that included a series of one time issues (again) that have investors spooked, but analysts almost universally believe GEL will have no trouble raising distributions at its usual 10% again in 2014, helped by growth of volumes on the CHOPS pipeline and by the lack of IDRs. Weather issues in the Permian caused LGCY to miss expectations in their earnings release this week. Shipping MLPs in general were weak, but beyond a few downgrades, I couldn’t find any company-specific news that would account for the outsized declines in GMLP and NMM.
On the positive side, PSXP continues to defy gravity, up another 10.3% this week, making it 2 straight weeks of double digit gains. The read-through continues for VLP, which has a very similar business model to PSXP, but is a few months earlier in its lifecycle.
On the year to date chart, PSXP is comfortably ahead of the pack now, overtaking CELP, which was own 6.7% on the week. No changes among the constituents in the bottom 5, but NKA crept a few spots higher this week.
News of the (MLP) World
This week’s $540mm KMP overnight transaction marked the first significant (>$150mm) public equity offering of primary units of an MLP so far this year. Mid-February is the latest point in a year that we have gone without a primary equity offering of at least $150mm in the last 8 years at least (my equity database goes back to 2005). The prevalence of ATM equity distribution programs in place and the large amount of equity raised by MLPs in 2013 has slowed down equity issuance materially year to date. If you’re tired of me saying that, sorry, but it’s a fascinating development for a sector whose capex plans have not slowed down.
Speaking of planned capex, there were several announcements on the organic capex front this week, highlighting continued opportunities to deploy capital. No M&A this week, however.
One more thing, Barron’s published an article highlighting the bear case for Kinder Morgan Energy Partners (KMP). The article’s primary source was the Hedgeye analyst Kevin Kaiser, who has recently had success with his sell recommendation and campaign against BWP several months ago, which dropped 45%+ in price last week. This article on KMP is basically the analyst’s victory lap after his success with BWP, but there may be some added volatility in KMP units this week. MLPs are almost becoming a regular thing at Barron’s after last week’s MLP Round Table discussion, maybe they should get an MLP column going…
Equity
M&A / Growth Projects