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December 31, 2017

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Week Thoughts: Settling Up

MLPs closed out a forgettable year (-6.5%) with a forgettable week (+0.5%).  MLPs did beat the broad stock market and utilities this week in what has recently become a trend (that hopefully continues in the new year).  Oil prices gained another 3% and finished on a multi-year high (above $60/bbl for the first time since mid-2015).

Status Update
MLPs went out on a high note, with a December gain of 4.8%, but it wasn’t enough to forestall another negative quarter, the 9th negative quarter in the last 13 and third in a row.  MLPs finished negative for the year for the second time in the last 3 years, and for only the 6th time in 22 years.  MLPs have never been negative for 3 years in a 4-year span.

January, as has been noted here many times before, has historically been the best month on average (+3.7%) for MLPs over the last 22 years.  MLPs posted a positive 4.9% return in January of 2017 and finished the year negative.  Without that strong January, MLPs would have posted a much lower return in 2017 (the last 11 months MLPs produced -10.9% total return).
Beating the Market
MLPs under-performed the S&P 500 by 2700 basis points in 2017, which isn’t the worst spread ever (2015 takes top honors).  Prior to that, MLPs had outperformed the S&P 500 for 12 straight years.
The S&P 500 just finished positive for a 9th consecutive year.  In 2017, the S&P 500 rose 19.4% on a price basis, almost exactly the amount it rose in 1999.  The S&P 500 didn’t have a great couple of years after that, but MLPs dramatically outperformed during that period.

After the last 3 years, there are reasons to have hope that MLPs will trade better.  But in today’s ETF-dominated, central bank-supported, increasingly correlated stock market, can MLPs have a positive return in a year when the stock market declines by 5-10% or even more?  Interested in your thoughts in our poll questions below.
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Winners & Losers
BPMP has been on fire the last two weeks, up another 8% this week.  On the downside, two big natural gas pipeline MLPs (SEP and BWP) were sharply lower in the final week of the year, for no apparent reason.

Three of the top 5 this week were among the bottom 5 year-to-date last week, which is interesting and maybe losers of 2017 will be winners in 2018 if MLPs mount a sustained rally.  NBLX won the year, but TGP made it exceptionally close with this recent NBLX weakness.

General Partners & Midstream Corporations
Midstream corporations outperformed MLPs this week, only one was negative (PAGP).  GPs structured as corporations (AMGP and TEGP) were particularly strong.  NSH continues to flip from bottom to top on any given week.

For the year, Cheniere took top honors among GPs and midstream corporations, successfully making the transition from development company to operating company.  Amazingly, the median 2017 total return matches the Alerian MLP Index, despite no overlap between the two groups.

Canadian Midstream Corporations
Canadian Midstream outperformed MLPs and GPs this week, like they did for the year overall.  Mega capitalization players ENB and TRP were the worst performers this week.  Pembina took top honors among Canadian Midstream (although Veresen did even better and is now part of Pembina).

Enbridge was the worst performer, a result of ongoing disappointments that started in January of 2017 with EEP’s guidance reduction.  With expectations reset at analyst day in December, Enbridge will attract some interest for a mean reversion trade relative to peers TRP and Pembina, pending exeuction of the new funding plan.

News of the (MLP) World
Light news week, but some trends are continuing.  One is proactive re-contracting to get ahead of contract roll-offs.  Another is executives buying their own stock, with a notable insider buy from EPD.  Capital markets activity will be closely monitored in 2018.  Looking forward, equity deals and M&A will be very interesting to look out for in the early weeks of 2018.

Capital Markets

  • None

Growth Projects / M&A

  • TransCanada (TRP-CA) announced agreement to sell U.S. retail contracts to EDF Energy Services (press release)


  • Tallgrass Energy (TEP) announced Continental Resources contract extension to ship crude oil with Belle Fourche Pipeline Company and Pony Express Pipelines through 10/31/24 compared to 10/31/19 previously (press release)
    • Starting in 2018, new uncommitted rates on the joint tariff of Belle Fourche, Pony Express, and Bridger Pipeline will be established, resulting in certain committed rates on the joint tariff being adjusted to $3.75/barrel for Williston basin origin points and $2.86/barrel for Guernsey, WY origin points on Pony Express
    • TEP continues to whittle away at uncertainty from contract roll offs with fresh contracts at current market rates
  • Jim Teague, CEO of Enterprise Products (EPD), purchased 11,300 units for $299k (filing)
  • Multiple closed end funds announced impact from tax reform (lower corporate rate specifically) on NAV, including:
    • Kayne Anderson MLP Investment Company (KYN) announced 11% increase (press release)
    • Tortoise Energy Infrastructure Fund (TYG) announced 11% increase and Tortoise MLP Fund (NTG) announced 6.75% increase (press release)
    • Closed End Funds had a much stronger month than MLPs, clearly aided by tax reform
  • CONE Midstream (CNNX) announced name and ticker change to CNX Midstream Partners (CNXM) following purchase of other 50% of general partner from Noble Energy (press release)


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