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September 26, 2011

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Week Thoughts: No Taxation Good, Liquidity Crisis Bad

MLPs had an outstanding week on a relative basis, beating the S&P 500 by more than 450 basis points, but lost 2% on an absolute basis.  This out-performance is even more pronounced compared to the energy index EPX (down more than 16%), and against crude oil’s 9%+ decline.  Most of that relative performance occurred on Monday, when MLPs were up 2.1%, while the S&P 500 lost 1.0%, after it became clear that a) the President’s jobs bill did not include taxing partnerships, and b) the President’s jobs bill had little chance of passing, and seemed more political than anything.  With the tax threat removed from the top of investors’ minds, MLPs melted up Monday and Tuesday, but couldn’t keep the divergence from broader markets going on Wednesday afternoon when the Fed’s operation “Twist” was announced.  From Tuesday’s close to the end of the week, MLPs dropped 4.8%, including 2.8% on Wednesday alone, as shown in the below chart of the MLP index for the week.

MLPs are currently yielding around 6.9%, or 509 basis points more than 10-treasury notes, compared to an average since 1998 of approximately 336 basis points.  This spread is as wide as it has been since late 2009.  For the most part, MLPs have done a good job of shoring up balance sheets and coverage ratios over the last 2-3 years since the last liquidity crisis, and are well positioned to outperform, as investors seek yield and as they recall how secure MLP distributions were through 2008-2009, with none of the top 25 largest MLPs cutting distributions.

Amidst the global stock market meltdown last week, there were clearly more losers than winners in the MLP space.  One MLP that I don’t cover, Terra Nitrogen Company, L.P. ($TNH), dropped 25.4% week over week, including 18.4% on Wednesday alone.  TNH has a variable distribution model and operates within a business that I don’t find as attractive as the traditional midstream MLP, but thought I’d point out its sharp decline on the week.  On the bright side, 6 MLPs that I cover had positive weeks last week, led by American Midstream ($AMID) and oil / refined products names like $SXL, $OILT and $MMP.  Coal names dominated the list of biggest losers this week, led by $PVR, which announced a joint ventures outside of its normal area of operations which seemed to rub some investors the wrong way.  On average, coal MLPs declined 6.4% week over week.

There was quite a bit of MLP news this week, including 2 equity deals.

  • Western Gas Partners ($WES) raised almost $200 million in an equity deal launched after the close on Monday (Press Release).  WES management continues to time the market exceptionally well, pricing the equity deal right after a run up in WES price, and right before a broad market sell off.
  • Enbridge Energy Partners ($EEP) also issued equity this week, raising $225 million (Press Release).

Other notable news:

  • As mentioned above, Penn Virginia Resource Partners (PVR) announced an unusual JV deal with Aqua America (Press Release).
  • Capital Products Partners ($CPLP) announces approval of its previously announced merger agreement with Crude Carriers Corp (Press Release).
  • Ferrellgas Partners ($FGP) announced completion of a small retail propane acquisition (Press Release).  FGP is also out this morning with disappointing earnings, more on that next week, I guess.
  • Plains All American announces expansion and raises guidance expectations for the third quarter (Press Release).  The unexpected positive results were due to strength in the Supply and Logistics segment, which continues to benefit from wide crude oil price differentials.  The transportation segment is also expected to outperform as a result of contributions from re-start of Rainbow pipeline.  It should be noted that investors have to come to expect positive surprises by PAA, given this is the 3rd quarter out of 3 this year in which PAA will exceed its guidance midpoint by more than 10%.  Analysts are saying they don’t expect this outperformance to lead to immediate distribution increases, as PAA is likely to reinvest the excess cash flow.
  • Alliance Resource Partners announces new capital project, to be funded with cash from operations, cash on hand and debt (Press Release).  Another example of ARLP’s continued execution of its growth strategy through ongoing development projects funded without the need for equity issuance.

Should be another very interesting week in the markets, which hopefully will continue to be led by MLPs, as investors take profits in gold and treasuries…

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