MLPs were down, but outperformed the broader market this week (MLP Index: -0.5%, S&P 500: -2.0%). Yield-based equities overall traded well (utilities traded up, REITs were roughly flat) helped by week-over-week declines in the interest rate on the U.S. 10-year of 14 basis points down to 2.65%. Dropping interest rates seemed to outweigh universally lower energy commodity prices, led by ethane (-7.5%). It was a strong showing for MLPs that might have been stronger if not for the 4 equity offerings MLP investors had to digest.
With earnings season behind us, transactions will be the primary catalysts for relative MLP performance. A couple of possible exceptions could be analyst days that happen for several MLPs prior to the next earnings cycle. I’ll be in Houston next week for the EPD analyst day, followed by some other MLP-related events that I hope will be instructive. Many have speculated that EPD might be gearing up to announce an ethane export project, I am sure that will be a major topic of discussion next Tuesday, especially with ethane prices back below $0.30/gallon.
Results were inconclusive from last week’s poll regarding the ubiquitous “innings” question. Below is a summary, but as of this writing the middle innings had a slight advantage over the 7th inning stretch.
The question of innings is tricky, because it can mean different things to different people. Is the question about where we are in the life-cycle of (1) MLP investment returns, (2) MLP participation in infrastructure build out, or (3) the MLP investor base?
The opportunity set for MLPs seems to have some legs to it. Recent IHS estimates have pegged the required U.S. energy infrastructure investment at around $890bn total over the next 12 years. If the U.S. energy infrastructure sector, including MLPs and natural gas pipeline corporations, is roughly $650bn of enterprise value, then one way to look at it is that MLPs have more than 100% to go in the next 12 years. That line of thinking would argue for the middle innings answer.
The maturity of the MLP investor base may be closer to late innings. Fund flows alone don’t seem to be enough to make the entire MLP tide rise these days. MLPs with distribution security and growth are seeing investment flows, but it seems to be at the expense of other, less well-positioned MLPs. It’s becoming more of a zero-sum game. Institutional capital continues to flow into the sector from new places, but the sector is approaching REITs and Utilities in size, so it is possible that the expansion of the investor base may be entering a twilight period, which would argue for the seventh inning stretch answer.
Yet another way to think about the innings question relates to super-cycles of infrastructure build out. We are in the midst of such a build out to expand the onshore infrastructure to accommodate growing sources of supply in the Marcellus, in Texas, in Canada and in the Bakken.
The next super-cycle of MLP infrastructure investment has already begun: the build out of infrastructure that’s required to connect the U.S. with the rest of the world with LNG liquefaction, LPG export and (potentially) ethane export facilities. In that sense, another game is starting while one is ending, like you will see late this week with the early NCAA Tournament games and their staggered start times. That’s the way I like to think about it, that the current game is in the middle innings, but another game is already beginning.
Wherever we are in the game, it’s clear that selection has never been more important in the MLP space. The number of MLPs from which to choose from has never been greater, the level of noise and distracting content (present blog excluded) around the sector has never been higher, and the consequences of misallocating investment dollars within the MLP space have never been greater (see BWP).
The NCAA Tournament starts this week. With the rise of the mid-Major conferences, the lack of 4-year star players at big-time programs, and conference hopping, the NCAA Tournament has become more competitive and harder to handicap. The perception now is that the tournament is more wide open than ever. That makes choosing winners in your bracket harder than ever. Sounds familiar…
So, good luck with your MLP and NCAA bracket selections this week. In both cases, remember it’s impossible to be 100% right, more critical to winning is avoiding the big losses that can bust your bracket (or portfolio).
Winners & Losers
ENLK was the runaway winner this week, its first week after the close of the Devon Midstream merger and after the name change to EnLink Midstream. Newsmakers SMLP and APL had very good weeks as well, up more than 5% each, despite each issuing equity in one form or another. Neither of the other two equity issuers (ACMP and SDLP) made the bottom five, which is a sign that their offerings were also well-received. 5th best performing MLP ARP was helped by the announcement that it would be added to the Alerian MLP Index.
Year to date, ENLK popped up close to the top of the list, alongside PSXP, which regained the YTD lead this week from GSJK. TEP stayed in the top 5, while TLLP moved up to replace CELP. On the negative side, the weak got weaker for the most part, with BWP, NRP, EPB and EROC all trading down for the week. CMLP replaced APL to round out the bottom 5.
News of the (MLP) World
In case you were wondering, the MLP capital markets are wide open to issuers of debt, equity and even preferred equity. This week we finally got our first $1.0bn+ MLP equity offering week, with 4 transactions for a combined $1.2bn of equity issued. We also saw $1.8bn worth of new MLP bonds issued across 4 offerings. And APL priced the first ever midstream MLP-issued preferred equity offering. The $1.2bn of equity this week represents approximately 36% of the total equity issued by MLPs in public offerings year to date ($3.4bn).
Also, on Friday it was announced that BWP and PVR were dropped from the Alerian MLP Index, replaced by PSXP and ARP. There were several other changes announced to other Alerian indexes that seemed to impact MLP stock price movements, which you can review for yourself at Alerian.com.
M&A / Growth Projects