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July 2, 2017

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Week Thoughts: Seeking a Better Half

Sweet relief came this week in the form of 7% higher oil prices that helped MLPs break a grueling 5 week losing streak.  At 4.2%, it was the second best week of the year, a strong finish to a disappointing first half for MLPs.  MLPs have traded up 7% since their 6/21 52-week low.  Rising interest rates was problematic for utilities and the S&P 500 this week, but oil prices (and maybe short covering) trumped rates for MLPs.

Status Update
June is in the books, and it was a 4th straight negative month, although much more palatable after the rally this week.  MLPs also wrapped up their worst quarter since 3Q 2015, and the 13th worst quarter since 1996.  Looking ahead, July has been one of the stronger months on average over time (2.7% average return since 1996, third best after January and April).

Atypical Slow First Half
Over the last 17 years (2000-2016) MLP performance in the second half of the year has outperformed the first half of the year 8 times, so close to an even split.  Each of the last 4 years, however, MLPs have performed worse in the second half than in the first half.  On average, second half performance has been much lower than first half performance over basically any time period.

MLPs beat the S&P 500 last year, but before that hadn’t outperformed the S&P 500 since 2011.  The S&P 500 has produced 9.3% total return so far this year.  If the S&P 500 were to remain flat the remainder of the year, MLPs would need to produce second half returns of 12.4% to catch up.   MLPs have done better than that 7 times since 2000, but only twice since 2009, and hasn’t cracked double digit second half returns in the last 6 years.
In other words, MLPs are due for a second half better than the first and due for a double digit return second half…maybe.  After the Pats epic comeback in the Super Bowl, anything’s possible.
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One Bite at a Time
As the old saying goes: How do you eat an elephant? One bite at a time.  How did I turn the immense pile of branches I trimmed into a neat row of paper lawn bags?  One branch at a time, one handful at a time.   How do you overcome 1000+ basis point underperformance vs. the S&P 500? One day at a time, one week at a time.

If MLPs do catch up this year they’ll need the inverse of the orderly, sustained selling we saw the last 5 weeks. They’ll need to do it one day and one week at a time.  But hopefully its faster than Melinda Mae in her eponymous Shel Silverstein poem, who ate an entire whale in little bites and finished in 89 years.

Happy Fourth of July, however you choose to celebrate.  Whether its fireworks at the beach, grilling out, visiting the Liberty Bell or watching National Treasure (again) with the family.
Winners & Losers
TOO shot higher this week, making it two straight weeks at the top of the sector, but its recent rally comes off a fairly low base.  Likewise, NGL and CCLP improved off their low bases.  CEQP’s conference efforts paid off with a firm bid.  AM recovered losses incurred after the RMP collapse last week pressured all producer-sponsored MLPs.  RMP recovered quite a bit as well, and finished the week 18.1% above its intra-day low from last Monday.

FGP made it two straight weeks in the bottom 5.

YTD Leaderboard
Halfway through the year and the range of returns is more than 80% wide already, reflective of an active 6 months of deals and disappointments.  OKS jumped back into the top 5 on its last week as an MLP after more than 20 years. NGL jumped EEP on the year to date leaderboard.

General Partners & Midstream Corporations
GPs and corps outperformed the MLP Index this week.  High beta names ETE, SEMG and AROC led the way.  ETE had some LNG half news that may have helped late in the week.  TEGP made it a second straight week near the top, and PAGP finally bounced.  AHGP was the only GP to be negative for the week.

News of the (MLP) World
Scant news flow this week.  Shout out to any junior bankers working on deals to be announced on 7/5/17, but my understanding is these days most banks have policies against making analysts work too much on weekends…

Growth Projects / M&A

  • Enterprise Products (EPD) announced new 300 mmcf/d natural gas processing plant near Orla, Texas (press release)
    • Orla II will double inlet capacity of the facility to 600,000 MMcf/d and increase extraction of NGLs from 40,000 bpd to 80,000 bpd
    • EPD has more than 1 bcf/d of natural gas processing capacity in the Permian Basin, driving more than 150,000 bpd of NGL extraction capacity
  • Energy Transfer (ETP/ETE), Korea Gas Corp, and Shell signed a Memorandum of Understanding to study joint participation in the Lake Charles LNG Liquefaction Project (press release)
    • The Lake Charles LNG Facility in Louisiana is owned 60% by ETE and 40% by ETP
    • Project at one time was expected to FID in 2016, but oil prices, oversupply in LNG markets, and Shell-BG merger slowed the process


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