MLPs: Back Down With Oil, Everything Else

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Includes: APU, BKEP, CCLP, CELP, D, DM, DPM, ETE, MPC, MPLX, NMM, OKS, PAA, PBFX, SE, SEP, STR, SUN, SXL, TLP, WMB, WPZ
by: Hinds Howard

A big selloff in all risk assets, including the S&P 500 and oil, led to weakness in MLPs this week. The US 10-year rate has now dropped 43 basis points so far this year. Also, in price action reminiscent of 2Q and 3Q calls, one large MLP's reduced outlook weighed on MLPs, but not quite as much as in 2015. One bright spot was that several of MLPs reported results that highlighted stability in natural gas pipeline and refined products assets. Next week, we'll get more results, and it's likely that we'll see more landmines as the gathering & processing MLPs begin to report over the next few weeks.

Weekly Review_2-5-16

Dramatic moves around distribution ex-dates have become the norm, magnified because distributions are so large as a percentage of stock prices. Most of the big MLPs have passed through their ex-dates for this quarter either this week or last, which may reduce some volatility in the sector in the coming weeks, all else being equal.

Poll Question Recap

Last week's question asked what single factor you thought was weighing on MLPs the most right now. The top pick was oil price, global growth or other macro factor (32%). Second was leverage and credit downgrade concerns (22%). Distribution cut fears were 18%. Technical selling and producer counterparty concerns were at the bottom of the list with 14% each. The results were a bit surprising, because I feel like I hear a lot about producer counterparty concerns, but it's probably right that oil price direction and macro growth concerns (related issues) are having the biggest impact on MLP prices right now, followed closely by balance sheet concerns.

Guidance Marathon

For background on MPLX (NYSE:MPLX), it is the MLP subsidiary of refinery Marathon Petroleum (NYSE:MPC). MPLX went public in 2012 at $22.00/unit and at a 4.8% yield, lowest ever IPO yield at the time. MPLX started with a 15-20% annual distribution growth target for "at least the next several years" (per a January 2014 investor presentation), then in October 2014, after MPLX unit price had taken a hit, management announced plans to accelerate growth rate to mid-20% over next 5 years. Then MPLX acquired MWE in a transaction that closed late in 2015. At its December analyst day, MPLX reiterated 25% annual growth through 2017 and 20% in 2018-2019, with no capital markets caveat. Then, this week MPLX reduced their 2016 outlook to 12-15% growth and removed any guidance beyond that. MPLX's price was crushed as a result, leading to a 33% decline for the week overall and a unit price of $20.17.

It is remarkable that what happened with MPLX this week is possible, after everything that's happened the past year… after PAA's August 5 bombshell that woke up the sector to potential distribution growth revisions across the board… after Targa's (NYSE:TRGP) fall from grace and eventual stealth distribution cut… after KMI's revised growth outlook and eventual outright dividend cut.

Amazing that the growth revision was handled so poorly and that it wasn't accompanied by clear additional sponsor support, either via IDR waivers or some kind of equity commitment at prevailing prices before the stock was decimated.

An MLP with a full balance sheet getting the opportunity to buy cheap assets with equity back to the sponsor at today's market price isn't that supportive. It definitely would have been viewed as supportive in February 2014 and probably in February 2015, but in today's MLP market, it's not enough. Today's market wants complete solutions, not half measures that leave details open to interpretation by the market, because the market's interpretation will be negative. Fitting that it happened the day after Groundhog Day, because it feels like we've done this a few times already.

The whole scenario and the name of the company remind me of the 1976 film Marathon Man, which starred Dustin Hoffman and Laurence Olivier. In the film's most memorable scene, Laurence Olivier's character tortures Dustin Hoffman's character using a dental probe on a cavity in tooth while repeatedly asking "Is it safe?." Dustin Hoffman's character had no idea what he was being tortured about at the time. It's pretty creepy.

The experience for MLP investors is some weird combination of both characters, where investors are being tortured with volatility and negative stock price action while they are repeatedly asking, "Is it safe?" Can I count on management's guidance? Can I count on distributions? Is it safe?

We think the answer depends on a number of MLP-specific factors, and there are some MLPs you can count on. Differentiation among MLPs continues to happen in sharp re-ratings that can be painful, but it is happening. The bright spot in this week's debacle is that the sector reaction wasn't as dramatic as we saw with others, although those others (KMI and PAA) were more bell weathers than MPLX. Another sign of differentiation emerging is that the sector didn't have any 5% declining days this week, even as oil declined and one of the largest MLPs dropped 33%. Some big MLPs had positive stock price performance this week related to their specific earnings or guidance.

Winners & Losers

The Spectra family of partnerships had a much better week than some other MLP families, with both DPM and SEP earning spots in the top 5. OKS seemed to tag along somehow. On the downside, NMM suspended distributions, driving it lower. CCLP made it two straight weeks in the bottom 5.

Top5Bottom5_2-6-16

CELP took the top spot for a second straight week and closed the week back above $10.

Top5Bottom5_2-6-16_chart

CELP is now the best performing MLP so far this year, followed by demand-focused MLPs TLP and APU. On the downside, MPLX joins the ranks of the distressed MLPs, despite not being distressed in the traditional sense of the word.

Top5Bottom5_2-6-16_YTD

Top5Bottom5_2-6-16_YTD_chart

General Partner Holdings Companies

SE's miraculous year-to-date performance continued this week after earnings and analyst day. On the downside, ETE took the bottom spot again, and questions remain as to what is happening behind the scenes as the stock continues to be crushed on a daily basis.

Top5Bottom5GPs_2-6-16

Top5Bottom5_2-6-16GPs_chart

News of the (MLP) World

There weren't many transactions this week, which is probably a good thing, because earnings results proved difficult enough to digest on their own. There were a few notable Energy Transfer 8-Ks that raise more questions than answers, for now…

News-of-the-World

Growth Projects/M&A

  • PBF Logistics (NYSE:PBFX) announced acquisition of 4 Philadelphia area refined products terminals from Plains All American (NYSE:PAA) for $100mm (press release)
    • As the old saying goes: one MLPs' trash is another MLPs' treasure
    • PBFX will invest $5mm into the assets, and expects them to produce $15mm in annual EBITDA, for an all-in multiple of 7x
    • These assets were not core to PAA and PBFX expects to be able to use its refinery sponsor to help commercially optimize the facilities
  • Dominion Resources (NYSE:D) agreed to acquire Questar (NYSE:STR) (press release)
    • Adds to the pool of available assets to sell to subsidiary MLP Dominion Midstream (NYSE:DM)
  • Blueknight Energy (NASDAQ:BKEP) acquired asphalt facilities for undisclosed purchase price (press release)

Other

  • Alerian announced new criteria for inclusion in the Alerian MLP Index (see criteria here)
    • MLPs will no longer be required to maintain a certain level of distributions or certain level compared with prior quarters, the only qualification for inclusion in the index is that you have paid a distribution of some amount in each of the prior 2 quarters
  • Energy Transfer Equity (NYSE:ETE) announced ETP CFO Tom Long to replace Jamie Welch as CFO of ETE's general partner (8-K filing)
    • Long "will be responsible for all financial aspects of the entire family of partnerships under ETE, including ETP, Sunoco Logistics Partners L.P. (NYSE:SXL) and Sunoco LP (NYSE:SUN)"
  • Energy Transfer Equity announced that current Williams Partners (NYSE:WPZ) CFO Don Chappel will serve as CEO of WPZ following the merger of Williams Companies (NYSE:WMB) into ETE (8-K filing)