As noted and discussed in my Friday post, the Alerian MLP Index was down 7.0% this week, and the Alerian MLP Equal Weight Index was down 7.7%, which is explained mostly by smaller-weighted upstream MLPs vastly underperforming, and mega-weighted KMP outperforming.
The interesting thing to note about the Equal Weight Index is that after this week’s decline, it is very close to flat for the year (not counting distributions), and is underperforming the S&P 500 by quite a bit. So, if you didn’t own KMP and you didn’t participate in any hot IPOs, and maybe had a few upstream MLP positions, your MLP portfolio is probably not having a very good year, which seems incredible given how just 6 weeks ago we were sitting at all-time highs.
Enough about MLPs, the real story of the week is commodity price weakness, and questions about where the demand will come from to soak up surplus oil given questions about global economic growth. WTI oil futures closed at $85.56/bbl, a 4.7% decline week over week. Natural gas, ethane and especially propane sold off sharply as well. Oil’s decline was just a continuation of the steady decline from the end of July when oil was above $105/bbl.
This week was a clear reminder that interest rates are second to fundamental commodity flows and prices in terms of impact on MLPs. The US 10 year rate was down 15 bps to 2.28%. Treasuries and U.S. utilities were two of the only places to hide out this week (the UTY index was up 1.1%).
Winners & Losers
Upstream MLPs were the clear losers this week (LGCY, QRE and MCEP all in the bottom 5). LGCY’s relationship with WPX (announced strategic changes to drilling focus this week) contributed to it having the biggest decline of all MLPs. Well, technically not all MLPs, because variable distribution MLP EMES was down 21.8%, and general partner holdco MLP ATLS was down 20.7%. CELP’s business is tied directly to upstream activities, which means it gets sold when energy and commodities get sold as well. SUSP seems to be the outlier among the bottom five, dropping 18.1% despite having a business that is driven by drop downs and not oil prices, but perhaps financing those drop downs gets more challenging in the current MLP environment.
On the upside, IPO USDP did ok, considering it was marketing against Dominion Midstream this week, and then it priced right into the worst MLP sell off in years. Non-US focused MLPs SDLP and GMLP did well. Lightly-traded small cap refined products MLP WPT beat everyone and was one of only 2 MLPs that went up in price this week.
Besides ATLS’s weakness, other GPs were pretty consistent in their under-performance: NSH (-14.3%), SEMG (-14.0%), CEQP (-12.6%), TRGP (-12.4%), ETE (-12.1%), ENLC (-11.1%), WMB (-10.2%), and OKE (-9.2%) were all down between 9-15%. WGP, KMI and PAGP, which all out-performed the MLP Index. The under-performing GPs included high-growth, popular GPs like SEMG, ETE, TRGP, and WMB, but also the limited growth GPs like CEQP and NSH. This is more evidence of widespread selling that (with a few minor exceptions) had little to do with outlooks for individual stocks.
The year-to-date chart looks a bit different this week. SUSP and RRMS fell out of the top five, replaced by EQM and SRLP. CMLP joined the bottom 5, while VNR joined the bottom 5 for the first time this year, after falling 24.5% since mid-September.
While not top of mind during this week’s meltdown, at some point in the next few months, we will learn the fate of KMP and KMI in the eyes of the MLP indices that Alerian manages. For now, Alerian has been understandably quiet on the issue, especially given how much capital tracks their indices.
The Alerian MLP Index is not capped, so keeping KMI in the index would make it a very large position, and around 35% of the index comprised of just 2 names (EPD and KMP), based on our calculations. There is at least one research analyst that believes Alerian might stage a staggered exit for KMP over more than one quarter if it does come out. Also, KMI could stay in one MLP index (like AMZI) while exiting the original index. A couple of questions / issues come to mind.
M&A / Growth Projects