The MLP index breached 300 on the downside twice and closed the week at its lowest level so far this year and lowest since 12/14/16. MLPs have dropped 2 weeks in a row, have declined 12% from their January peak, have produced negative total return YTD, and have produced just 3.2% total return the last 12 months. Adding insult to injury on this short but painful week, utilities and stocks again outperformed, while the 10-year treasury rate drifted lower towards 2.00% again.
Oil prices weakness continues to overwhelm any potential bounce in energy and MLP sentiment. It wasn’t just oil prices this time. Natural gas dropped back to $3/mmbtu, a 7.1% decline this week. But year over year, natural gas, ethane and propane are all up 10%+, while oil and MLP prices are negative.
I attended the MLPA conference in Orlando this week. The conference saw a material year over year decline in investor sentiment, attendance, and weather. Almost by default, MLP management teams came off as more confident than investors in the current environment and outlook from here.
With the migration away from the MLP structure from several large MLPs over the last few years and with the proliferation of new conferences, the MLPA conference isn’t the premier midstream event that it was even just a few years ago.
The weather in Orlando was terrible, with periodic storms all week, indicative of the mood across midstream. Like Eeyore, MLPs must feel like rain clouds are following them wherever they go these days.
MLP negativity is less acute than last February near the bottom when I posted that negativity was peaking for MLPs. Negativity these days feels less intense, but more chronic, more of a dull pain than the stabbing pain of last year. MLP owners are frustrated at the apathy of the market towards MLPs despite improvements year over year, which hurts conviction that the sector has righted itself. Hedge funds aren’t helping sentiment with skepticism and cynicism.
The negative sentiment across energy, oil and MLPs seems a bit extreme for the current fundamental environment. U.S. oil inventory is moving in the right direction. Midstream companies are confidently building new infrastructure to meet customer demands and production growth.
The positive outlook for growth capital should eventually lead to growth in cash flow. As we’ve seen in the past, times of great pain and frustration among investors are often very good buying opportunities. MLPs have now seen price correction of 10%+ and a washout of generalist investors from the beginning of the year, setting up for their return and better days ahead for those that have remained.
The MLP index declined 4.1% in May. It was the worst month for the index since October 2016. It was the worst May in 5 years. MLPs have decline in each of the last 3 months, the longest losing streak for MLPs since the streak that ended in February 2016. Also, MLPs are now negative year to date.
Looking forward, June has already gotten off to a rough start, but over the years, June has been a solid month with positive performance in 10 of the last 14 years.
Winners & Losers
There wasn’t much positive price action across the sector to get excited about, but of the few positive MLPs this week, two were propane MLPs and one was a wholesale gasoline distributor. Small capitalization, demand-focused MLPs with largely retail investor bases performed the best this week. ETP was among the worst performers, as it continues to face challenges on the Rover construction process, and the market continues to punish them for it. No news on any of the others in the bottom 5.
CCLP, which seems to have dropped around 10% a week for the last month, was the biggest loser of the week.
OKS dropped out of the top 5 this week, replaced by SUN. We now have just 4 names in the sector with more than 20% gains for the year, while on the downside, we have 4 names that have declined more than 30%, both troubling trends compared with where we were a month or two ago.
General Partners and Midstream Corporations
GPs and midstream corporations underperformed MLPs again this week, with a median decline of 3.2%. TEGP was the worst performer, while ETE made it two straight weeks close to the bottom of the group. On the positive side, AMGP was the only GP to be positive and for a second straight week it led the group. KMI showed some relative strength late in the week after an insider purchase by Rich Kinder.
News of the (MLP) World
No big equity deals or M&A this week. DCP followed last week’s TRGP NGL pipeline project announcement with an expansion of its Permian NGL takeaway pipeline. A few other MLPs announced efforts to gain commitments for their pipeline projects. A few of the more outspoken MLP executives stepped up to buy shares of their companies. But the biggest news may have been on the HR front, as MPLX poached Mike Hennigan from Energy Transfer.
Growth Projects / M&A