What Do Twitter And The Alerian MLP Index Have In Common?

|
Includes: AMJ, AMLP, AMU, AMUB, BWP, CEQP, ENLK, EPD, ETE, KMI, TWTR
by: Alerian

By Kenny Feng

Click to enlarge

Twitter (NYSE:TWTR) and the Alerian MLP Index (AMZ) are both platforms for communicating information. It turns out they have one other thing [1] in common too: each is celebrating its 10-year anniversary [2] this year. Alerian launched the AMZ as the first real-time MLP benchmark on June 1, 2006, and we consider ourselves fortunate to have had a front-row seat to the evolution of the structure, the companies that have utilized it, and the stakeholders that have invested in and serviced those companies during the past decade. So as the date approaches, we'll be writing a short countdown post each week with interesting AMZ-related facts and figures during a given year. But in today's post, I'll address the second-most frequently asked question [3] we receive: What led to the launch of the AMZ?

Seeing an opportunity to build a long-term business around what he viewed as an emerging asset class, Gabriel Hammond left his equity research analyst position at Goldman Sachs in 2004 to found Alerian Capital Management LLC [4], an MLP-dedicated asset management firm. But not a lot of investors [5] wanted to give the responsibility of managing their millions to a bunch of 20-somethings. So, as an exercise in marketing and brand management, we thought that launching an index would be helpful. But not just for us: we hoped that a real-time benchmark available via major data distribution channels would save MLP IR teams and sell-side analysts a lot of time, as each company and investment bank was calculating its own composite. We also expected that having 10 years of back-tested [6] data would help define and legitimize the structure, particularly in the eyes of institutional investors.

Much has obviously changed since then (shale revolution, anyone?): The number of MLPs more than doubled, and market cap quadrupled. Oil prices skyrocketed and crashed-twice. Seventeen [7] of the 50 constituents are no longer trading today, including the entities that were consolidated into Kinder Morgan (NYSE:KMI) in 2014. Enterprise Products Partners (NYSE:EPD) became a behemoth with an index weight north of 20%. Energy Transfer Equity (NYSE:ETE) has been a roller coaster of investor sentiment. GP interests were bought and sold, and IDRs were reset. Several constituents, including Boardwalk Pipeline Partners (NYSE:BWP) and the predecessors of Crestwood Equity Partners (NYSE:CEQP) and EnLink Midstream Partners (NYSE:ENLK), cut their distributions because they found themselves on the wrong side of The Domino Effect. Yet the AMZ has remained steadfast in objectively documenting the performance of MLPs.

We are thankful that the MLP stakeholder community responded enthusiastically on and shortly after the launch date, and leave you with some prescient [8] quotes from 10 years ago.

Mary Lyman, Executive Director, Coalition of Publicly Traded Partnerships [9], June 1, 2006:

The sector's market capitalization has nearly doubled to $75 billion in the past two years and the analysts I talk to expect it to double again before the end of the decade. The MLP sector today could be on a similar trajectory to REITs in the late 1980s and I believe that tremendous growth lies ahead given the strong need for new energy infrastructure investment and the continued migration of existing assets into the MLP structure. This benchmark will be tremendously helpful to investors trying to track the performance of these companies.

Rick Gross and Adam Karpf, Equity Research Analysts, Lehman Brothers, June 1, 2006:

The index should both improve the sector's visibility to a broader shareholder base and eventually provide additional capital to the industry based on our view it will lead to the launching of an exchange traded fund that will enable more investors to participate in the MLP sector in 2006. Specifically, retirement accounts, foreign investors and institutions, which have historically had difficulties investing in the MLP sector, could now more easily invest in partnerships through the ETF. This should provide a strong catalyst driving stronger fund inflows into MLPs and a significant lift to the sector given the current limited float and trading liquidity in the industry. In our view, the launching of the Alerian MLP Index, which leads to an ETF, is a major positive development for the industry.

Ethan Bellamy, Equity Research Analyst, Stifel Nicolaus, June 1, 2006:

We consider this new index to be a useful tool for MLP investors tracking the relative performance of the sector to other sectors and the relative performance of index components. We also consider the arrival of an NYSE-backed index as a milestone in the burgeoning maturity of the MLP sector.

Ron Londe, Equity Research Analyst, AG Edwards, June 8, 2006:

We believe that this index will be a positive for MLPs as it should help promote investor visibility of the sector. The index can be used to better measure the group's performance relative to other indexes associated with REITs, utilities, bonds, etc… You could see the creation of investment vehicles such as MLP Exchange Traded Funds (ETFs). This could lead to an increased demand for MLP units.

Ted Gardner and Jeff Musser, Equity Research Analysts, Raymond James, July 10, 2006:

We view the index as a positive for partnerships as it should help MLPs gain mindshare as a distinct asset class among investors. The index could also eventually be developed into an ETF-like instrument which could potentially provide a means for institutional dollars to flow into the group.

Footnotes:

[1] That’s the extent of our list. If you come up with any other commonalities, we’d love to hear them at index@alerian.com.

[2] Maybe if we send Jack Dorsey a tin of bird-shaped cookies, he’ll send us a tin back of pipeline-shaped ones?

[3] Second only to how the company came to be called Alerian.

[4] In 2010, Alerian spun off its asset management operations. The company also dropped the “Capital Management LLC” portion of its name to reflect a sole focus going forward on equipping investors to make informed decisions about MLPs and energy infrastructure through the provision of benchmarks, analytics, and research content.

[5] We are of course appreciative of the ones who did. We continue to believe that experience is a double-edged sword that provides historical perspective but also increases one’s propensity toward confirmation bias, and as such, should only be one of many factors to consider in a hiring decision of any kind. But I digress.

[6] To back-test is to rigorously apply then-current index methodology to each historical rebalancing date to select and weight constituents. A back-filled or back-casted history can result in the exclusion of acquired, bankrupt, or otherwise delisted companies and distort historical performance.

[7] Fifteen merged or were acquired, one went bankrupt, and one dissolved.

[8] Our company was supposed to be called Prescient Capital, but a trademark search weeks before launch revealed that the name was already taken (thank you, hedge fund formation craze of the aughts).

[9] The Coalition changed its name to the National Association of Publicly Traded Partnerships in October 2006, and is now known as the Master Limited Partnership Association after another name change in September 2015.

Disclosure: © Alerian 2015. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Kenny Feng, CFA is the President and CEO at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Over $19 billion is directly tied to the Alerian Index Series, including the flagship Alerian MLP Index (AMZ). Mr. Feng is a former Managing Director and Portfolio Manager at SteelPath Capital Management LLC, a Dallas-based MLP investment manager. Prior to his experience at SteelPath, Mr. Feng covered MLPs, Electric and Gas Utilities, and Diversified Gas Companies at Goldman Sachs & Co in the firm's Global Investment Research Division. Mr. Feng graduated summa cum laude with a Bachelor of Science in Economics from the Wharton School and a Bachelor of Arts in International Studies from the University of Pennsylvania.