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June 2, 2013

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Week Thoughts: Rising Rates Spook MLP Bull

MLPs had their worst week of the year (MLP Index down 4.3%)  to cap their worst month of the year (-2.1%, first negative month).  Interest rates appear to have been the trigger (10-year treasury rate spiked 12 basis points on Tuesday, up to 2.16% by Friday’s close), but its my contention that many marginal MLP owners were waiting for a reason to sell, and took the rate spike as a signal to exit.  With MLP pooled vehicles and ETFs, it has never been easier for capital to flow into and out of the sector.  Longer term retail investors have ordinary income recapture and $0 basis issues, but hot money that got in late 2012 or that owns MLP exposure through an ETF, doesn’t have the same impediments to selling.
Most everything else was down for the week as well: S&P 500 was down 1.1%, all MLP-related commodities were down, REITs were down, utilities and bond funds were down.  If a sector or asset class has a yield, or depends on cheap financing, chances are it was down.
Weekly Review_5-31-13
A Quick Update of MLP Index Total Return:

  • This week: -4.3%
    • Last week: +1.0%
    • Week ended 5/17: -0.4%
    • Week ended 5/10: +2.5%
    • Week ended 5/3: -0.1%
  • May: -2.1%
    • April: +0.9%
    • March: +5.4%
    • February: +0.9%
    • January: +12.6%
  • 2Q So Far: -1.2%
    • 1Q 2013: +19.7%
    • 4Q 2012: -3.4%
    • 3Q 2012: +8.9%
    • 2Q 2011: -2.3%
  • 2013 Year to Date: +18.4%
    • 2012: +4.8%
    • 2011: +13.9%
    • 2010: +35.9%
    • 2009: +76.4%

The Alerian MLP Index’s 4.32% decline this week was the worst week for the Alerian MLP Index since almost exactly a year ago.   Last year, the week ending 6/1/12 saw the MLP Index drop 4.33%.  Last year’s version came two weeks after the worst week of 2012 (-5.3%).  This year comes on the heels of all time highs.  Looking back at weekly data over the years, when MLPs correct, it often starts with a big weekly drop, then there is a pop the following week, then another weekly drop.  If that pattern repeats, this upcoming week may be the bounce week, that draws in some dip buyers, before we see the Index decline again the week after.
I’m not expecting MLPs to bounce right back and make new index highs in the next few weeks.  I think it may be a while before we make a new high on the MLP Index.  Using weekly data, the longest time period between new all time highs in the Index was the time period from July 2007 to October 2010, or 168 weeks to be exact.  The longest we’ve had this year was 4 weeks in between fresh highs.  In 2011, there was a 34 week break between new highs, and in 2012 there was a 31 week break.  If the break we started last week persists for that long, we will have already seen the 2012 high point (all of these data points are for the price index, not including distributions)…
Or I could be wrong (which I have been several times already this year with regards to timing) and maybe we see MLPs bounce right back up to fresh highs, at which point you’ll probably see trampoline pictures here… I just don’t see what the catalyst would be.  Equity financing needs will continue will, and even if interest rates dropped back down, some of the shift away from income vehicles of all kinds seems to have begun, and its hard to stop that migration once it starts.  At some point value buyers come in and MLPs will eventually reach new highs.  I’m still holding waiting to deploy cash in client accounts for now.
I was looking for a hook for this week’s post, something about when you mess with a bull market you get the horns, or something about how the bull market in MLPs was just a bond bubble that dressed MLPs in a bull costume.  I don’t think these half-baked analogies have any merit, but I liked the pictures I came up with…

Bullspit

Winners & Losers
Not every MLP was down this week, actually 13 MLPs were up (76 of the ones we track were down).  HCLP was up 13.1% for the week to lead all MLPs after being in the top five last week.  HCLP seems to be back on track, up 56% since its December 18th bottom.  SXE was in the top 5 for the second straight week as well.  On the downside, MMLP led the losers.  Notable high flyer TLLP was down big as well, after leading the sector last week.  LRE was in the bottom 2 for the second straight week.  Notably, neither of the MLPs that issued equity this week were in the bottom five.

Top5Bottom5MLPs_5-31_13

Looking at the year to date rankings, SMLP retains its top spot from last week.  BPL and TLLP were replaced in the top five by DKL and HCLP.  OXF, which has held the bottom spot in the sector for months now, was replaced at the bottom by EVEP, which was joined in the bottom five by new bottom five member LINE and existing member LRE.  Upstream MLPs, a bullish call of Guzman & Company research (me), are not doing great generally, but we don’t cover the three upstream MLPs in the bottom five, so there is that.

Top5Bottom5MLPs_5-31_13_YTD

Looking at MLPs compared with broader securities, the S&P 500 is closing fast on the MLP Index, which has never underperformed the S&P 500 for consecutive years.  That may change this year if things continue as they did this month.  GPs are still well out in front of the MLP Index.

MLPs_World_5-31_13_YTD

News of the (MLP) World

News-of-the-World

Equity

  • Global Partners (GLP) files S-3 to sell up to $500mm in debt and equity securities
  • Vanguard Natural Resources (VNR) prices offering of 7.0mm common units at $28.35/unit, raising $198.5mm in gross proceeds
    • Guzman & Company acted as a co-manager on the transaction
  • Boardwalk Pipeline Partners (BWP) prices offering of 11.0mm common units at $30.12/unit, raising $331.3mm in gross proceeds
  • Teekay Offshore (TOO) files equity distribution agreement to sell up $100mm of common units at the market
  • Plains All American Pipeline (PAA) files updated equity distribution agreement to sell up to $750mm of common units at the market

Debt

  • Cheniere Energy Partners (CQP) announces closing of $5.9bn of credit facilities to fund construction of Sabine Pass liquefaction trains 3 and 4, and is proceeding with construction

M&A / Growth Project

  • Legacy Reserves (LGCY) announces acquisition of 668 boe oil reserves in the Permian Basin for $72mm from Resaca Exploitation, Inc.
  • Teekay Offshore (TOO) announces acquisition of 50% interest in a floating production, storage and offloading unit from Teekay Corp for $204mm
  • Markwest Utica EMG (JV between Markwest and Energy Minerals Group) announces plans to construct an additional (third) 200 mmcf/d gas processing facility at its Seneca processing complex in Ohio
  • Boardwalk Pipeline (BWP) and Williams (WMB) announce key JV agreements related to proposed Bluegrass Pipeline and related fractionation, storage and export projects
    • Project includes construction of new NGL pipeline from producing areas in Ohio, West Virginia and Pennsylvania to an interconnect with BWP’s Texas Gas Transmission system in Kentucky
    • A portion of the Texas Gas system will be converted from natural gas to NGL service from Kentucky to Eunice, LA
    • JV will construct a new large scale fractionation plant and expanding NGL storage facilities in Louisiana and constructing new pipeline to connect these facilities to the Texas Gas system
    • Project expected to be in service in late 2015
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