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January 27, 2012

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Winners and Losers: Natural Gas Hope, Propane Despair

The story this week, until NRGY blew up (figuratively) on Friday, was natural gas prices bouncing 14.5%.   A combination of (1) curtailed dry gas production announcement from Chesapeake, (2) some happy talk on natural gas as the clean answer from President Obama in his State of the Union Address, and (3) how low gas prices were last week helped ensure the bounce.  As a result of stronger commodity prices, royalty trusts had a strong week, up 5.2% on average.  MLPs and stocks were helped by the Fed’s announcement that it would be keeping rates low through 2014, but MLPs were held back on Friday after several large distribution ex-dates (notably $KMP and $EPD) saw investors taking money off the table.

NRGY had a rough Friday, falling more than 23.5% on the distribution announcement press release it released, more on that in Week Thoughts later this weekend.  It is interesting to see that NRGY’s new public subsidiary, $NRGM, was in the top 5 this week after research initiation pieces came out with glowing reports.  NRGM is now up 6.5% this year, compared with NRGY down 29%, pretty amazing disparity.  NRGY’s drop overshadowed a rough week for Chesapeake Midstream ($CHKM), which dropped 5.9% this week on news of curtailed dry gas drilling plans out of parent company $CHK. more on that later as well.

MLPs are set to finish January positive as usual, but stocks are winning so far this year, as investors seem to be feeling less defensive and are favoring stocks over MLPs right now.  Interesting to see stocks and gold going in the same direction, but gold’s move probably has something to do with the Fed’s commitment to lower rates at the expense of the dollar, which was down this week and down on the year.  Royalty trusts are down for the year following oil and gas prices down.  General partners are outperforming again.

All top five MLPs are small caps that were beaten down last year.  As investors become less defensive, expect this trend to continue with small cap recovery stories beating large cap MLPs that are going to get sold as investors exit the ETF and ETNs in favor of other stocks.  Bottom five is dominated by propane MLPs, but also includes SXL and CMLP.  SXL appears to have lost steam after a 40%+ year last year saw some analysts cutting ratings and price target on valuation and slowing growth now that crude spreads have narrowed.  CMLP appears to be struggling because its assets are largely in dry gas areas, which may see production declines with natural gas prices so low.

So, those are the numbers this week, more thoughts coming later in the weekend.

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