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September 28, 2013

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Week Thoughts: Quiet Week, MLPs Flat for the Win

The MLP Index just barely kept its rally going for a third straight week with a 0.2% gain, but it fared much better than the S&P 500 (-1.0%).   More Washington BS seems to be the reason for the market’s decline this week, and MLP strength is probably due to the combination of fear driving interest rates lower and a lack of significant MLP equity offerings.  Commodity prices certainly weren’t the reason MLPs outperformed. They were almost universally down, led by a 4.6% decline in natural gas price, and oil prices that are drifting back down towards $100/bbl.  We’ll see if the market reacts with a relief rally once the federal government reaches another deadline deal before the end of the month.

Weekly MLP Review_9-27-13

As shown in the chart below, MLPs really separated themselves on Wednesday and Thursday morning, before trading down with the S&P 500 Friday.

Weekly AMZ_9-27

MLPs reclaimed the lead over the S&P 500 for the year so far, but MLP GP holding companies and their strong week are way out in front at 26.6% total returns on average for the year, with 4 of the 8 above 40%.  Variable distribution MLPs continue to struggle, with the average variable distribution MLP down 2.2% this week and up 0.4% YTD.  But take away EMES’s 83.3% total return and the average goes down to -9.9%, with RNF (-30.0%) and ALDW (-38.7%) being the worst performers.


Barring a huge day on Monday, MLPs will finish the 3rd quarter in the red, despite a strong September so far.  Someone asked me how rare it is to see a negative quarter for MLPs.  Turns out, not so rare.  In the 72 quarters of Alerian MLP Index data we have, 21 have produced negative total return (29% of the time).  The worst ever quarter was -20.3% in 4Q 2008.  The worst since then was 3Q 2011 (-7.0%).  MLPs so far this quarter have produced -1.0% total return, in line with normal seasonal weakness type of stuff and certainly not the end of the world, despite everything we’ve heard about interest rates and young, tweeting short sellers.

Winners & Losers

EROC (+10.8%) led all MLPs this week, CLMT led the losers (-10.9%), more on both below.  No discernible pattern in the winners and losers, a wide range of subsectors represented by the winners and losers chart.


EROC is up big in the last 30 days, up 19.8% to $7.20/unit from its intra-day low of $6.01/unit on 8/27.  There is still a ways to go before it reaches the $10.50/unit area again, and there are still plenty of questions to be answered with EROC.  Is this building momentum a sign of potentially positive results based on recent heavy price NGL strength?  Will EROC find a strategic solution to its distribution coverage problem or will they be able to grow out of it?  Or will EROC again disappoint at earnings time and send the stock from this latest lower high to a new lower low?  (disclosure: I cover EROC and have a Neutral rating on it, also the fund I manage is long EROC).


On the opposite side of the ledger, CLMT closed the week down 10.9% at $27.00/unit, a fresh 52-week low.  CLMT peaked early in 2013 at $39.80/unit, and has dropped 32.2% since then on the combination of tighter refining spreads from tightening Brent-WTI differentials, ongoing refined products demand destruction, higher RIN costs, and now weakness in asphalt demand from sequestration cuts.  Also, reported distributable cash flow for 2Q was negative (never positive when the coverage ratio is “NM”).  Is this a temporary confluence of factors with CLMT at the vortex or is this current environment the cause for regarding potential distribution cut or a switch to a variable MLP model?  Sign up for equity research at Guzman & Company in the upper right hand of this site to hear my answers on CLMT in the next week, and on EROC prior to its earnings release…


No change in the constituents or the order of the top and bottom 5 year to date.  EROC and SMLP had big weeks, and AMID had a bad week, but there was no change in the constituents or the order of the year to date top and bottom 5.


News of the (MLP) World


Not a lot happened this week (hence all the pictures and the dearth of words).  There was a fresh IPO filing and a few updates to previously filed S-1’s, but no follow on deals. I imagine a fairly large amount of ATM equity was raised into the MLP strength, however. Once the OCIP IPO prices next week, there will be 5 MLP IPOs on file (with recent filings), 1 GP IPO and the Cheniere spinoff.   We will also have seen 13 MLP IPOs price YTD, 1 more than we saw all of last year.  Chances are we get to at least 17 or 18 MLP IPOs for the full year, which would be a record.

IPO Backlog_9-27


  • Devon Midstream Partners, L.P. (DVNM) files initial S-1 to raise up to $400mm in an MLP IPO (filing)
    • Will own 20% of Devon Energy’s midstream business initially
  • OCI Partners (OCIP) launches IPO of 17.5mm common units with a midpoint price of $20.00/unit, implying a 10.75% yield (roadshow presentation can be found here)
    • Variable distribution MLP
    • Expected to price week of 9/30

M&A / Growth Projects

  • Enterprise Products (EPD) announces additional expansion of its  Houston Ship Channel LPG export terminal, increasing its capacity by 1.5 mmbbls/month, bringing total design capacity to 9 mmbbls/month (press release)
  • Teekay LNG (TGP) announces acquisition of a second 155,900 cubic meter LNG carrier newbuild, and announces it will charter it back to Awilco LNG ASA at a fixed rate for four years (press release)
  • Capital Products (CPLP) announces extension of three product tanker charters to BP Shipping Ltd (press release)


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