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July 9, 2017

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Week Thoughts: Oil Takes Another Licking, MLPs Keep on Ticking

MLPs reversed intra-day to finish positive Friday, which when combined with outsized gains Monday, was enough to finish the week slightly positive.  That makes two straight positive weeks and two straight weeks of outperforming the S&P 500 and utilities.    MLP capital markets activity has been negligible for over a month now, which is perhaps a contributing factor to MLP strength this week.

MLPs ticked higher despite another rough week for oil, natural gas and NGL prices (NGL prices above are from Thursday).  MLPs have proven much less durable than advertised, and their rare strength this week in the face of weak commodities is a testament to how the perception of MLPs as durable has changed.  It is now a surprise when MLPs show signs of durability in the face of macro volatility.
Speaking of durable advertisements, the Timex one below may remind some older investors of a time when MLPs could have shared Timex’s catchy tag line.  It’s doubtful that either MLPs or Timex can fully restore their past glory, but they can prove useful for their intended purposes.

For MLPs, that original use case was as a fixed income alternative tied to ownership of a long-lived, hard asset with some tax deferral advantages.  That still seems achievable in today’s low interest rate world, but it probably requires more capital discipline among MLPs, more rationalization and consolidation.
Poll Question Recap
I posed a simple question last week: will MLPs have higher returns than S&P 500 in 2017?  62% said no, which is logical given the dramatic outperformance year to date for the S&P 500 vs. anything related to energy (ex-utilities).
But there are some optimists out there.  Or maybe it’s a combination of optimism for an MLP rally combined with skepticism that the S&P 500 will continue higher.  In any event, thanks for participating.  So far, so good, though as we are one week into the second half, and MLPs are ahead by 0.1%!
Winners & Losers
MLP performance varied wildly this week, as usual.  TCP and SPH continued the recent trend of natural gas pipelines and propane MLPs, generally defensive groups of MLPs, outperforming.  In June, those two groups of MLPs outperformed other sub-sectors as commodity prices dropped.  Year to date laggards CCLP and TOO both spiked last week and faded this week, although both held onto some of their gains.  Other than that, no real trends apparent.


Year to Date Leaderboard
On the leaderboard for the year, PTXP no longer trades, but retains the best return, although I expect it to be overtaken at some point as the year progresses.  CPLP popped into the top 5 after leading all MLPs for the week.  Among the bottom 5, just EEP had a positive week, but no changes in order among the losers.


General Partners and Midstream Corporations
GPs and corporations underperformed the MLP Index this week, tracking more closely with oil prices.  Perhaps that signals some shift in retail interest in MLPs vs. institutional selling of corporations.  Higher beta names like SEMG, AROC and TRGP did not surprise with losses on oil price weakness.

EQGP’s decline may have been related to the EQT activist investor that made noise on Monday.  AMGP’s decline may have been the result of lower NGL prices and natural gas prices.  WMB continues to trade defensively after its strategic shift away from commodity businesses via asset sales and de-leveraging / simplification transactions early in the year.  TEGP didn’t get much love this week despite its dramatic quarterly dividend increase.

News of the (MLP) World
Another week of no capital markets action, although there were a few interesting tidbits related to…wait for it…the Permian Basin.  Also, another CEO stepped up and bought units of its MLP, although that same CEO hasn’t been spending much time with his fellow unitholders at investor conferences lately.

Growth Projects

  • Summit Midstream (SMLP) announced natural gas gathering and processing system to serve XTO Energy in Delaware Basin (press release)
    • System will include gathering lines, two compressor stations and a 60 mmcf/d processing plant
    • Initial assets expected to be in service by June 2018 at a cost of $110mm
    • SMLP will build the complex with ability to expand to over 600 mmcf/d of processing capacity as needed to support production growth
    • Another non-Permian player adding Permian exposure, like we’ve seen with CEQP, NS and BPL (aspirational at this point) this year
  • Enterprise Products (EPD) announced additional long-term contracts from producers for its Midland to Sealy pipeline (press release)
    • EPD now has commitments for 83% of the initial committed capacity of its 450,000 bbls/d Midland to Sealy pipeline project (net of 45,000 bbls/d walk up capacity)
  • Plains All American (PAA) announced long-term pipeline commitment agreement with international commodity trading firm Trafigura to supply up to 100,000 bbls/d of condensate on Cactus Pipeline to Corpus Christi (press release)
  • Magellan Midstream (MMP) and Plains All American (PAA) announced open season for additional 40,000 bpd capacity on their 50/50-owned BridgeTex Pipeline and a new origin in Midland (press release)

Other

  • Energy Transfer (ETP) CEO Kelcy Warren buys 1mm units of ETP for $20.3mm (form 4)
    • Represents a small piece of Warren’s stake in ETE ($3.5bn+), but is still a large purchase that didn’t come with any strings attached this time
  • Jana Partners has taken a 5.8% stake in EQT Corp (EQT) and wants EQT to separate its pipeline operations instead of acquiring Rice (13D filing)
    • Jana prefers EQT to be a pure E&P company and questions the price of the deal
    • If successful, this would have large implications for EQM, EQGP and RMP
    • The plan includes former Atlas Pipeline senior management, including Jonathan Cohen, Ed Cohen, and Dan Herz

Distribution Announcements

  • TEGP: $0.3425, +19.1% quarter over quarter, +39.8% year over year
  • TEP: $0.92, +10.8% qoq, +22.5% yoy
  • EPD: $0.42, +1.2% qoq, +5.0% yoy
  • Flat: PAA, TGP
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