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July 30, 2012

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Winners and Losers: MLPs, Energy Sidelined As Market Rallies

After5 straight positive weeks, MLPs fell this week by 1.2%, trailing the S&P 500 and gold price, both of which were up this week.  MLPs typically don’t fare too well during the first few weeks of August, but we’ll see in a few weeks whether this week’s negative price action was a pause on the way to higher highs, or just the next leg down in the range bound cycle MLPs have been caught in since 4Q 2011.   5 weeks is a good run, but falling oil and gas prices took their toll on MLPs this week, not to mention weaker than expected earnings released by several MLPs, particularly the ones that have NGL price exposure of any kind.

Winners & Losers

STON led the losers this week, down 12.5%, surrounded by quite a bit of drama, at least on the Internet / blogosphere.  Two separate Seeking Alpha negative articles were published, and in the comments of those articles, both authors pulled no punches in basically accusing mgmt of fraud (see here and here).  STON responded with a press release that helped it recover a bit on Friday.  But the damage has been.  Other big loser was CMLP, which issued $104mm in equity and announced an acquisition.  On the plus side, NGL led the way after announcing a huge distribution increase of 13.8% to lead all MLPs this quarter.

For the full year, the coal names dominate to bottom 5, with EROC as the non-coal name rounding out the top 5.  RNO cut its distribution 7.3% quarter over quarter, and cut its distribution to its subordinated units, but only dropped 2.4% week over week, which has to be a record low decrease for an MLP cutting its distribution.  People always say that a distribution cut is priced into the stock, but usually it gets MORE priced in after the distribution cut get announced.  I guess that a small consolation for the second worst performing MLP this year.  On the positive side, the top five remains the same, led by NKA and CQP.

Distribution Scorecard

There were more than 30 quarterly distribution announcements this week.  So far, 61 MLPs have announced distributions (not including the GP holding companies), with 29 flat, 31 increases and 1 decrease (RNO).  The top 20 largest increases are listed in the table below.  Quite a mix of MLPs, highlighting the ability for owners of very different asset types all benefiting from the MLP wrapper.  NGL leads all MLPs with a 13.8% increase.

MMP’s 12.2% quarterly increase was a pleasant surprise for MMP investors.  It was the largest quarterly increase ever for MMP, which has grown its distribution at an annual rate of 9.9% for the last 3 years.  It is quite rare for a large, mature MLP to raise its distribution by double digits, mainly because of the dollar amount that is involved.  The 12.2% increase represents $11.6mm in additional quarterly distributions from MMP, or a $46.4mm annual rate.  That got me thinking about where this ranks among large cap MLP distribution increases.  So, in the chart below, I show the 12 MLPs with more than $5.0 in equity market capitalization, and check what their highest distribution increases were and when they occurred.   The shaded items represent distributions announced this quarter.

The top two on the “since 2000” list (LINE and ETP) were not the large caps they are today when they had their big distribution bumps.   Same with KMP and EEP in the ranking on the right.  MMP’s distribution raise was very unique.  I have written often of the power of IDR cash flows that benefit financial backers of MLPs, but Magellan this quarter was a clear case of the power of NOT having IDRs, and its benefit on limited partner investors.

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