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July 22, 2011

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Week Thoughts: Propane Tank's Empty

MLPs as a whole were fairly range bound this week, with the index oscillating between 372 and 375 all week.  $KMP came out with earnings that were muted, but management indicated that the year was going better than expected in their original budget, which would allow them to raise distributions at a faster rate than originally planned.  As a result of $KMP’s 0.9% distribution increase and its equity offering last quarter, $KMI was able to raise its distribution 3.4% quarter over quarter (a mild upside surprise).  So, beyond KMP earnings and many distribution announcements (see below), not much news this week, and therefore not much price action for the index on a week when the S&P 500 gained 2.2%.
MLP Index compared to other investment indexes for the week.

The fireworks for the week came from $GLP, an MLP too small to be in the MLP index.  On the week, $GLP was down 14.4% after the partnership issued a statement guiding their earnings lower than expected.  Management announced they are implementing cost cutting measure as a result of continued weak margins in the wholesale gasoline segment of the business.  GLP has a seasonal business that results in weak results in the second quarter every year, so some weakness is expected, but clearly margins are decreasing along with volumes.  GLP did announce the partnership would maintain its distribution for the quarter, and every indication is GLP’s distribution coverage ratio remains above 1.0x.
GLP was just recovering from a volatile few months, beginning in early May when the entire sector took a hit, but GLP suffered more than others as a result of a lawsuit filed against its parent company by a group of Connecticut gas stations alleging that Alliance Energy (parent company) was engaged in price gouging when selling gasoline to the stations.  GLP had fully recovered by last Friday when its unit price closed above $27.  See the roller coaster ride since April below.

Other MLPs that are facing declining margins and declining volumes suffered this week.  Citi equity research nailed the propane MLPs this week, downgrading $NRGY and and $FGP to sell from hold, and downgrading $SPH to hold from buy.  As shown below, $NRGY took the biggest beating, after Citi put a $31.50 price target on the partnership, which started the week trading at around $35.50.

All the new shale supply creates opportunities for MLPs that cater to the drilling and supply side of the value chain.  But it is also pushing prices down for natural gas, and tightening historical seasonal spreads in natural gas prices and geographical differences in price, which is wreaking havoc on the natural gas storage MLPs (see $NKA), propane MLPs, and wholesale distributors like GLP.  So, it seems that resident around shale plays aren’t the only ones with complaints about shale gas.  In any event, this is another example of why it pays to follow these trends and actively manage your MLP portfolio.
There were many distribution announcements this week (see below).  In total 30 MLPs have announced distributions, 17 of them have raised distributions (57%), for an overall average growth rate qoq of 2.2%.  4 GPs have announced distributions/dividends, 4 have raised them (100%).

  • $MWE raised distribution 4.5% quarter over quarter
  • $MMP raised distribution 1.9% qoq
  • $SPH kept distribution flat
  • $KMP raised distribution 0.9% qoq
  • $KMI raised dividend 3.4%
  • $NRP kept distribution flat
  • $GLP kept distribution flat
  • $CMLP raised distribution 4.5% qoq
  • $TCLP raised distribution 2.7% qoq
  • $XTEX raised distribution 6.9% qoq
  • $XTXI raised dividend 11.1% qoq
  • $TLP raised distribution 1.6% qoq
  • $SEP raised distribution 1.1% qoq
  • $PSE kept distribution flat
  • $TLLP kept distribution flat
  • $OXF kept distribution flat
  • $STON kept distribution flat
  • $CPLP kept distribution flat
  • $TOO kept distribution flat
  • $TGP kept distribution flat
  • $CLMT raised distribution 4.2%
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. Long GLP, NRGY, KMI.
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