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October 13, 2012

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Winners & Losers: MLPs Less Bad

MLPs were down, but not as much as the S&P 500, buoyed by higher oil and natural gas prices.  The broader market was sunk this week by weak early earnings, uncertainty about next week’s earnings and perhaps some fatigue.
Things in the energy markets never stay the same for too long, natural gas is now driving certain MLPs higher, ethane has reached glut territory calling into question NGL-focused MLPs, and coal MLPs are moving higher on natural gas price strength.  We’ve still got a long way to go before we see the oil and natural gas rig count flip again, but its nice to see some life in some MLPs that had been discarded earlier this year.

While there were no MLP equity offerings this week, the sector faced headwinds from 2 large equity offerings by MLP-affiliated corporations (LNCO and KMI) to the tune of $3.5bn in equity.  Other than those deals, there was little MLP news.
Winners & Losers
In a light news week, this week’s performance was all commodity prices and beta.  Each of the top five have their operations in some way levered to natural gas prices. ACMP continued to power higher, and is now up 5 consecutive weeks.  Chesapeake (CHK) is still ACMP’s biggest customer. CHK was up 5% on the week and higher natural gas prices are adding confidence to ACMP’s story. Higher gas prices means more wells drilled by CHK, which means more activity for ACMP’s systems, which equals higher distributable cash flow and higher unit price.
Coal MLPs RNO, OXF and ARLP were up this week, as it seems like three weeks of natural gas prices above $3.00/mmbtu was enough to earn a pop out of coal names.   We won’t see the impact of these higher natural gas prices in the third quarter earnings for the coal MLPs to be released in the next few weeks, but on the earnings conference calls it will be interesting to hear what management teams are seeing with their utilities customers for steam coal.  If natural gas prices go higher from here and Romney wins the election, we may start to hear about power plants switching back to coal, but we’re still pretty far away from that.
On the downside, none of the bottom five had any company specific news releases or transactions.  CLMT took a huge tumble, down each day of the week and 12.6% overall.   A “sell sell sell” in Jim Cramer’s lightning round on Wednesday certainly didn’t help, but was not the cause.  Also, it should be noted that investors who bought CLMT at the close of last year are still happy with a 54.4% total return in 9.5 months.  XTEX was one gathering and processing MLP that didn’t see an uplift from higher natural gas prices, down 5.8% this week, after it was up 5.6% last week.  SPH led last week’s winners, up 7.8%, but gave some of that back down 5.5% this week.

For the year, OXF has made a big come back of late (up 33% since right after its distribution payment August 7th) and is now down only 26% year to date.  Like the last place team in baseball playing for pride, OXF may actually finish the year out of last place, especially if natural gas prices continue to float higher.  CLMT tumbled from its top spot on its horrible week, giving up its 1700+ basis points lead on RRMS from last week.  ARLP and NRP were both up this week, inching closer to escaping the bottom 5.

The broader picture for the year looks pretty good.  MLPs are still trailing stocks and gold, but not my as much as a few months ago.  Natural gas and oil have moved in opposite directions so far this year, as the warm winter and excess supply of natural gas has given way to optimism, while the sluggish economy has lowered oil demand expectations in the face of growing supply from shale plays.  As a speculative bet on inflation and against the dollar, brent seems to be the purer bet, not muddled by our domestic capacity and demand issues, and that may be keeping oil down a bit as well and is certainly contributing to the wide spread between the domestic and global oil benchmarks.

 That’s it for now, back tomorrow night with a news wrap, and some more of that color you guys like so much…

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