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June 24, 2012

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Winners & Losers: Oil Slide Punishes E&P MLPs

MLPs did ok overall this week, E&P and gathering & processing MLPs were mostly down, while the rest of the MLP universe was mostly up, if only slightly.  The overall market was lukewarm, down 0.5%, caught between more credit rating cuts of European Banks and slightly more monetary stimulus from the U.S. Fed with the rest of Operation Twist announced.

Oil prices were below $80 Thursday, well below prices even the most ardent oil bears expected.  Some people I know or read expect oil prices to drop once global shale production starts to happen, but even those guys weren’t predicting oil would drop this much, this soon.  Raymond James has come out with a $65 oil price target for 2013, and continues to lead the street on the oil bear side, but even they admit the drop has happened much faster than expected.
Its starting to feeling like natural gas prices did a few years ago, when analysts kept predicting natural gas prices to bounce back above $5, but it just kept drifting lower.  Crude is obviously a very different commodity, sold globally and subject to geopolitical shocks.  But it seems like those that are long oil have moved geopolitical factors closer to the top of the list of reasons they are long crude.  Its tough to bet on war with Iran to justify an investment, similar to when investors long natural gas would bet on a hurricane to save their position.
Even still, I believe oil will bounce in the 3rd quarter this year, maybe back to $100 per barrel, before plummeting again in 2013.  Maybe its the overall doomsday feel to the world investment community, but the global oil supply growth case seems more likely than the global oil demand growth case does for the next few years.
Oil prices had a large negative impact on the E&P MLPs this week, as evidenced by LRE, QRE and LGCY in the bottom five.  APL is a confusing one; it announced positive datapoints on its Velma expansion, and reiterated EBITDA guidance and NGL hedges for 2012, but it still goes down 7.6% for the week.  On the positive side, interesting to see NRGM, NKA and PNG all up big in the same week, maybe now that NGL-levered assets are falling out of vogue, maybe natural gas storage is coming back in style.  Relative strength lately for natural gas has something to do with it.
SXL was up 5.5% and announced a new pipeline project to transport crude out of the Permian Basin to Gulf Coast markets.  Don’t think there was much of a causal relationship there, but perhaps there was.

For the year, MLPs are creeping closer to breakeven, despite plunging natural gas and oil prices.  GP holdco MLPs have outperformed their subsidiaries so far this year, and variable distribution MLPs are the runaway winners (even counting PDH’s dismal performance since its IPO), led by Rentech Nitrogen (RNF) with 67.6% total return for the year so far.

A coal MLP still occupies the cellar in the MLP space (OXF at -46.9%), but LRE and EVEP have recently taken over the next two worst positions, displacing other coal and propane MLPs.  On the winning side, NKA is having a bounce back year to lead the sector, although a few months ago 29.4% total return for the year would have barely broken into the top 5, but the sector as a whole has been roughed up lately, but I don’t have to tell you that.

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