Hinds Howard's  Instablog

The S&P 500 finally broke lower this week, after 6 straight positive weeks. It seems that we are reaching the upper limit of the market's range absent the stimulus the markets keeps trying to price in. Friday the market turned positive after some hopeful musings by Big Ben, something about there being scope for further Fed action to ease things. We'll see how long that lasts next week.

In energy markets, while oil prices held up well last week and continues to drift higher this summer, natural gas dropped again and is now down 5 straight weeks. Also down big this week were propane (-13.7%) and ethane (-9.7%). MLPs were down 1.3% this week on no news of consequence. The Alerian MLP Index was up on Monday and down each day after that this week. The market's late uptick on Friday didn't bleed into the MLP space.

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For the year, MLPs are still trailing the S&P 500, and variable distribution MLPs still lead both by a wide margin. Natural gas, which was almost even for the year 5 weeks ago, is back down 9.6% for the year, while oil continue to creep towards breakeven and towards $100 per barrel.

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Winners & Losers

EVEP was the big winner this week, up 8.4% on the latest information out of Enervest on how their Utica wells are doing. NRGY was the second biggest winner this week up 6.5% after Monday's buyback announcement, a very rare one indeed for an industry that typically pays out most of its available, rather than spend it to boost its stock price. It has worked so far, however, and like I've said before, NRGY management is willing to make whatever moves necessary to fix its unit price problem. EROC continued its upward climb as well this week, and is now up 8.7% since August 13th.

On the downside, FGP was a big loser this week, down 9.9% on no news. Likewise, BPL continues its downward slide, approaching its 52 week low of $46.61 per unit on June 4. STON actually did hit its lowest point of the year on Friday. BPL and STON were both in the bottom last week as well, that can't happen 3 times in a row, can it?

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For the year, BPL has fallen into the bottom 5, and EROC has popped out of it. The top 5 constituents remain the same as last week, but CLMT moved up 2 spaces to 2nd on the year.

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It will be a very quiet week this week for MLP deals. It will be a chance for everyone (like me) to catch up on reading and other things we've been neglecting. I for one am planning to get my Texas drivers license and to take my daughter to her first day of public school. Unlike Rodney Dangerfield and Billy Madison, however, I am done with school and academic decathlons....what is everyone else doing this week?

MLPs had a good week, and so did most other risk assets. "Risk free" 10-year treasuries did not fare so well, as yields on those rose 17 basis points higher all the way to 1.82%, their highest point since May 11th. Oil futures also reached their highest point since May 11th, closing the week up 3.5% at $96.15 after 4 straight positive days. Natural gas futures dropped for the fourth week in a row to $2.74.

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As discussed here before, in the short term MLP performance is much more correlated to oil than to interest rate moves. This week is a good example of that in action. Oil prices moving higher trumped the yield spike (hard to call it a spike when rates are still well below 2%, but on a percentage basis that's a big week over week move) and helped send MLPs higher. It is intuitive that oil prices should be more correlated to MLP prices than treasuries, because the impact of oil prices on operating results is much higher than the impact of treasury moves (which might have a small impact on interest expense), especially with an ever-increasing share of the MLP space taken by upstream MLPs.

The next few weeks, in the absence of capital markets activity, expect MLPs to move along with the broader market and with commodity price changes, with a slightly positive slant on account of less marginal supply of equity flooding the market. Over the last few months, the market and oil have been very nice things to hitch your wagon to, as confusing as the constant march higher for the stock market has been to most professional investors that are on TV.

The story of the week was the Hi-Crush IPO, which popped the most on its first day than any other MLP IPO in 5 years. The success of the two most recent MLP IPOs (Hi-Crush and Northern Tier), despite both pricing well below the price range, bodes well for other MLP IPOs in the offing. Not sure which one IPO will go off next, but there will be more services MLPs to file and go public going forward.

News of the (MLP) World

• Boardwalk Pipeline (BWP) announces JV to acquire PL Midstream for $625mm from Lindsay Goldberg (press release)
  • BWP to invest $132mm, Boardwalk Pipeline Holdings Corp (owned by Loews) to invest $268mm, the JV will borrow the rest
  • PL Midstream operates salt-dome storage, pipeline transportation, fractionation and brine supply services from two hubs in southern Louisiana
  • Assets include: 53.5mm barrels of salt dome storage capacity, 11.2 bcf of working natural gas storage capacity, significant brine supply infrastructure and 240 miles of pipeline transportation assets
• Hi-Crush Partners (HCLP) prices $191.8mm IPO at $17.00 per unit
  • Priced $2.00 below the filing range of $19.00-$21.00 per unit, for an 11.18% yield
  • Traded up 17.6% on its first day of trading to close at $20.00
  • Regular MLP with IDRs, a minimum quarterly distribution and subordinated units
• Calumet (CLMT) announces acquisition of Montana Refining Company, Inc. for $225mm from Connacher Oil & Gas (press release)
• EROC prices public offering of 8.8mm common units at $8.72 per unit
  • Gross proceeds of $76.7mm
  • Marketed offering over course of one day, 2.67% decline from announcement to pricing
• MWE prices public offering of 6.0mm common units at $50.72 per unit
  • Total gross proceeds $304.3mm, priced at 3.85% discount to last close
• Four S-3s filed this week:
  • NRP filed to register 16.6mm units owned by Adena Minerals, LLC and $500.0mm in primary common units (filing)
  • ETP filed to register $1bn of primary equity or debt, $526mm in units owned by ETE (filing)
  • UAN filed to register 50.9mm units (worth around $1.3bn) owned by GP (filing)
  • PSE filed to register $500mm of primary equity or debt (filing)

MLPs were up 1.4% this week, helped by broader market strength (S&P was up 1.0% this week) and strength in oil prices (futures up 3.5%). There was 1 IPO that crushed it this week, and 2 follow-on equity deals for a total of $572.2mm in gross proceeds. After the debt offering explosion last week, there were no bond deals this week. General partners under-performed this week, due to KMI trading down. Variable distribution MLPs were up 1.5% helped by RNF and NTI, each with another big week.

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We are very near the end of the summer capital markets season. There may be a few follow on offerings that get done in the next few weeks, but no more IPOs until September. That leaves 12 still in public registration. And they all have to be pretty happy with how well the last 3 IPOs have performed in the aftermarket, even though the last two priced a combined $7.00 per unit below the pre-launch IPO price ranges.

Speaking of IPOs, in its first trading day (Thursday), HCLP popped 17.6%. It was the 7th biggest MLP IPO pop ever, and biggest in more than 5 years. HCLP fell 2.6% Friday, but still managed to outdo gains of all other MLPs. LRE and MCEP were up big due to the oil price strength this week. TLLP was up on TSO's announcement of the acquisition of BP's California refinery, because there will likely be some drop downs to TLLP that materialize from the deal.

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Year to date breakdown of the top 5 and bottom 5 is below. CLMT popped back into the top 5 this week, the market liked its latest announced acquisition this week. For the bottom 5, NRP rejoined the bottom 5 this week. Every one of the bottom 5 had a positive week except CMLP.

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Overall year to date, MLPs are up 6.3% so far, which is less than half the return of the S&P 500, but better than a slap in the face. Variable distribution MLPs continue to be huge winners, led by the fertilizer MLPs. Oil and natural gas are down on the year, but oil has risen to more than $96 this week and look s as strong as its been in months.

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