MLPs grinded higher by 0.4% this week, overcoming the first 3-week losing streak for the S&P 500 since January, helped by oil prices that broke above $46/bbl on positive demand and inventory data points.
The MLP Index touched 300 intraday a few weeks ago, but still hasn’t closed above 300 since 11/30/15. This week, the index again inched towards 300, reaching as high as 295 Thursday before falling back Friday.
It feels like there’s a consistent bid for MLPs, MLPs wavered at various points throughout the week, but the bottom didn’t fall out. MLPs continue to hold above the 200 day moving average, but not surprising to see MLPs “consolidating” after the incredible rally off the bottom.
One Word: Plastics
First quarter earnings season is over, 2016 leverage and funding needs to varying degrees have been solved, the high yield and equity capital markets are improving, and MLPs have stabilized. All of this is on the back of forceful oil price rally in the face of record inventory levels.
The market has stepped back from the abyss, and appears comfortable that MLPs (midstream ones at least) aren’t going out of business. Multiples have expanded to a level that is pricing in stability and eventual growth for industry cash flows beyond 2016/2017.
The extreme fear and uncertainty to which we had grown accustomed has subsided. As the adrenaline fades and valuations have recovered, the sector today reminds me of the last image from the movie the Graduate. The iconic moment after Dustin Hoffman’s character Benjamin convinces Elaine Robinson to run away from her wedding with him. They have hopped onto a passing bus and are seated in the back. The excitement fades and they stare off into space. The implication is that after this extreme moment of passion and excitement: now what?
Expectations remain fairly low for 2016, but for MLPs to mount a further rally from here, further multiple expansion is necessary, and therefore further confidence in cash flow growth in 2017/2018 is necessary (absent a wave of cash-based M&A from external sources…).
In light of recent MLP performance, I thought we’d revisit the previously presumptive GP rollup transactions.
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Winners & Losers
RRMS’s ascent continued this week, making a rollup by its general partner less attractive and less necessary with each tick. GEL and WPZ were the leaders among MLP Index constituents. On the downside, DPM gave up some of last week’s sector-leading gains, while SDLP’s contract termination news confirmed weak fundamentals for offshore rigs and dragged down RIGP as well.
Outside of CPLP, the bottom 5 are all down less than 20%, while the top 5 are all up more than 50%.
SDLP dropped out of the top 5, while DKL joined the bottom 5.
General Partner Holding Companies
Overall, GPs underperformed MLP slightly. TEGP and OKE made it back into the top 5. Oil beta stocks PAGP and SEMG were among the winners after lagging last week. Questions remain on whether some of these remaining holding companies consolidate with their MLPs in an effort to reduce overall distributions or otherwise improve their financial situation. If RRMS and WPZ continue to rally sharply, however, what had become a vicious cycle turns virtuous again and collapsing the structure makes increasingly less sense. That’s sort of a catch 22 for some of these stories where the MLP may be rallying partly because a rollup is expected.
News of the (MLP) World
Debt capital markets provided most of the action for transactions this week. A total of $2.5bn of new bonds priced this week for MLPs, including some pretty attractive yields for non-investment grade paper for TLLP. LINE’s bankruptcy brought out the MLP boo-birds, who were happy to have something to crow about given recent strength for MLPs. Also, Tepper added to his MLP positions.
M&A / Growth