Another deflating week in MLP land, although MLPs outperformed oil prices and finished the week on a positive note with some relief Friday. MLPs finished down 1.1% overall, in-line with utilities. MLPs have declined 1%+ for 3 straight weeks, which hasn’t happened since November 2015 when KMI’s leverage and dividend cut drama escalated. On the bright side, since 2010 MLPs have not recorded 4 straight 1%+ decline weeks in a row.
Oil prices continue to plague the sector. With oil traders looking for a reason to sell oil, Wednesday’s surprise inventory build obliged and sent oil to close to year to date levels. Natural gas and ethane prices were bright spots in an otherwise frustrating week for energy investors.
Acting Out: In company-specific news, another smaller oil player (like NS earlier this year) took to the M&A market to reach for more scale and more attention from the market. SEMG’s $2.1bn transformative acquisition did get the market’s attention, but not the kind SEMG was hoping for. Adding scale or growth is important, but it doesn’t come cheap.
Analyst Daze: North of the border, ENB’s investor day extended the analyst day curse, dropping 2% when no major catalyst was announced. Like KMI, EPD, LNG, PAA, WMB analyst days, stocks don’t tend to react positively to a thorough review of midstream assets. The analyst day as catalyst hasn’t really been a thing since back in the day when ETE would announce some new twist on financial engineering each year.
While still nominally a fundamental MLP investor, myself and other MLP veterans have had to become (at times) commodity analysts, chartists, credit analysts, and most recently “sentimentalists”. The collective investor base’s feelings towards oil, energy and MLPs has become THE conversation in the sector.
What could turn sentiment and encourage buyers to rotate from utilities and technology stocks towards MLPs and energy stocks? As discussed here, I think $50/bbl oil is the answer. Absent $50/bbl oil, there will be opportunities to outperform on stock-specific (possibly fundamental!) factors, but broad-based fund flows aren’t likely to return without $50/bbl oil or until 2H 2017 volume ramp shows up.
Alternatively, sentiment could get so bad that we run out of sellers and it becomes a bullish setup. If we have another 1% decline next week, we’ll explore that thesis further.
With all the swings in MLPs recently, we’ve experienced several key inflexion points. There was the trough in February 2016, the OPEC cut in November 2016, and the peak in February this year. MLPs are still up 58.1% since the 2016 bottom, and were up 8.6% year to date by mid-February, but are down nearly 12% since then, and are down around 4% year to date (through Thursday). It remains to be seen if the February peak was the high point for MLPs this year, but we’ve got plenty of time for an epic comeback.
In an effort to see if we could spot some trends in performance this year and since the latest inflexion point when MLPs peaked in mid-February. Below is a breakdown of the 80 non-variable MLPs and 13 GPs/midstream corporations I count in my universe. I break down that 80 into 55 midstream MLPs, 10 shipping MLPs and 15 non-midstream MLPs (e.g. EVA, CELP, CCLP).
The playbook for weak MLP markets historically has been to own natural gas pipeline MLPs, large cap MLPs, and wholesale distribution MLPs. But in the most recent downturn, a portfolio of gathering & processing MLPs and small cap MLPs with some diversified large cap MLPs would have outperformed.
This year has been very tricky in seeking to identify trends, because there have been big winners and losers in almost every category. Avoiding stock-specific blow ups and catching some positive strategic announcements (like OKS, SUN or PTXP) has been the path to success.
Winners & Losers
Wide range of returns this week, with NBLX leading all MLPs. TCP was a notable laggard as a generally defensive that tends to trade with lower beta, although ATM issuance overhang may have been a factor.
Year to Date Leaderboard
NBLX’s strong week pushed it back near the top. The rest of the top 5 either has announced a takeout (PTXP, VTTI) a major asset sale (SUN) or is expected to be acquired (WNRL). On the downside, TOO took over the bottom spot with another awful week. CCLP was the only bottom 5 name that traded up this week.
General Partners and Midstream Corporations
SEMG’s under-capitalized acquisition was met with heavy selling, leaving SEMG at the bottom of the group. On the upside, the market seems to have started to get past TRGP’s over-capitalized growth project after a rough few weeks. Natural gas players WMB, LNG and KMI were also among the winners, while TEGP continues to lag.
News of the (MLP) World
MLPs successfully accessed the equity capital markets this week, albeit at high costs. SEMG announced a transaction and some equity at a price that’s now a 19% premium to its current price. TEP continues to advance on external growth away from Rockies Express, as foretold on TEP’s earning call. Finally, the number of MLPs in the AMZ shrunk again, but gained in midstream exposure.
Growth Projects / M&A