What Happens When The Going Gets Tough?

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Includes: ANDV, ANDX, CMRE, CMRP, CNXC, ENLC, ENLK, ETE, GPP, NBL, NBLX, NGLS, PSX, PSXP, TRGP, TRP, WMB
by: Alerian

By Maria Halmo

It's no secret that things are rough out there. MLPs and millennials have a lot in common these days: running to the bank of Mom & Dad, moving home, or just grinding it out.

What happens when the going gets tough?

You run to the Bank of Mom & Dad
While I have never personally used this bank (a fact my father references with pride [1] by quoting rock and roll), I'm lucky enough to have it available to me, and so are some MLPs (contrary to some investor fears). Tesoro Corporation (TSO), the GP of Tesoro Logistics (TLLP), committed to buying the entire equity portion of the LA refinery logistics dropdown and removing the potential for equity overhang in the process. Phillips 66 (NYSE:PSX) did a similar thing with the Bayou Bridge dropdown to its MLP, Phillips 66 Partners (NYSE:PSXP), even selling its interest in the crude oil pipeline project at cost. It's a little bit like if your family business was snow removal. Your parents agree to sell you a snowplow, and also buy the baseball cards you're selling to raise money to buy it.

Marathon Petroleum (NYSE:MPC) took this a step further with its MLP, MPLX (NYSE:MPLX), promising to support MPLX's distribution growth guidance [2] by potentially dropping down assets at attractive multiples, giving back IDRs, buying MPLX units, loaning money intracompany, or incubating expansion projects acquired in the MarkWest Energy Partners (NYSE:MWE) merger.

The support of a parent is wonderful, but as a unitholder, remember to consider the financial health of the parent, not just its existence.

You and Your Family Support the Business
You are an artist hitting hard times. Your parents buy your paintings, sculptures, and first editions of your novel, sure that you'll be famous one day and that these will be worth much more. Similarly, EnLink Midstream LLC (NYSE:ENLC) bought $50 million in units of its LP, EnLink Midstream Partners (NYSE:ENLK).

You Move Back In With Your Parents
Targa Resources Corporation (NYSE:TRGP) announced that it will be buying back its MLP, Targa Resources Partners (NYSE:NGLS). We initially wondered if this was a ploy to fend off a hostile takeover, given that Energy Transfer Equity (NYSE:ETE) did make an offer last year, and Williams (NYSE:WMB) tried this tactic, unsuccessfully, to avoid being acquired this year. But I digress. We stand by our belief that this does not signal the reincorporation of MLPs. A couple of boomerang millennials does not mean an entire generation is now living at home. However, as an investor, with NGLS down 23.9% in November and TRGP down 31.2%, especially compared to the Alerian MLP Index (AMZ) down "only" 8.9% for the month, investors have already stopped inviting the boomerang kids to parties downtown.

You Never Move Out In the First Place
Generally, when we see new IPOs, it's a signal of market strength. So, to my surprise, Noble Energy (NYSE:NBL) launched the IPO of their MLP, Noble Midstream Partners (NYSE:NBLX), on November 12th. After a little digging into the parent's financials, it turns out that the offering was actually a signal of NBL's desperate need for cash. One week later, NBL postponed NBLX's IPO due to "unfavorable equity market conditions." So maybe not that desperate.

There were 22 underwriters on the deal trying to place 12.5 million units. If NBLX had priced at $15, which is where, depressingly, the last two MLP IPOs of Green Plains Partners (NASDAQ:GPP) and CNX Coal Resources (NYSE:CNXC) priced, it would have been yielding 8.3% and raised $187.5 million, or 5 bps of the entire energy MLP space. Presumably, not enough buyers could be found. This is the most disheartening thing I've come across all year. It's like finding out a high school friend is not only still living at home, but he's still working at Applebee's, his high school job.

Containership owner Costamare Inc (NYSE:CMRE) went even further-formally withdrawing the registration of its MLP, Costamare Partners (CMRP). That's the high school friend who has just given up.

You Sell Junk on eBay
With commodity prices somewhat stable, bid-ask spreads are tightening. But much like how when you search on Craigslist for used laptops, the only ones you find are used Macs from the aughts, the assets available are mostly mediocre and from financially distressed companies. If the current environment persists, better assets will become available. That's when private equity will leave the sidelines.

You Make Questionable Decisions
President Obama rejected Keystone XL, and then TransCanada (NYSE:TRP) investors traded the stock down over 5% on the news. This decision had been telegraphed for years, we've written about it several times, and yet, somehow, TRP investors managed to still be surprised. Like, your parents tell you that there won't be money for college, but you still make a decision as if there is. Then you're surprised when you have student debt.

You Just Hang In There
Just like how you're sure your son or daughter is a smart kid, despite post-college shenanigans, long-term MLP fundamentals remain solid. Despite a disappointing 30.1% drop [3] in the AMZ this year, MLP distributions have continued to grow [4], and disheartened investors can (sort of) take comfort in the fact that tax loss selling [5] season is almost over. It should be noted that no one, us included, can quantify how much of the technical weakness is attributable to tax loss selling. We can tell you, however, that exchange-traded products aren't the boogeymen. Only two out of 25 MLP exchange-traded products [6] saw outflows last month, and we've seen growth in overall shares and notes outstanding year-to-date. Beyond hanging in there, it looks like some investors are doubling down.

Footnotes:

[1] He also makes sure to say that Blood Sweat and Tears performed it in 1969, but it was originally a Billie Holiday song in 1941. Also that it may refer to Luke 8:11-18, and that he never really liked BS&T. My father is delightfully thorough about music.

[2] Per slide 76 of yesterday’s analyst day presentation.

[3] On a total return basis through the end of November. The first few days of December haven’t exactly been pretty either.

[4] Trailing-twelve-month distribution growth for the AMZ is 5.7%, and for the AMZI, it’s 7.7%.

[5] It should be noted that no one, us included, can actually quantify how much of the technical weakness is attributable to tax loss selling.

[6] This excludes RIC-compliant funds that have 25% or less direct exposure to MLPs.

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.

Maria Halmo is the Director of Research at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Halmo leads the firm's research efforts, which include examining MLP regulatory filings, monitoring legislative activity, and investigating industry developments. She also oversees Alerian's public communications strategy through investor and media outreach. Ms. Halmo is a former Associate at SteelPath Capital Management LLC, a Dallas-based MLP investment manager, where she conducted valuation analyses of petroleum transportation partnerships and researched macro-level energy issues. Ms. Halmo graduated with a Bachelor of Arts in Astrophysics from Barnard College at Columbia University. She is also a contributing author to Midstream Business, a monthly publication addressing the need for business market intelligence on North American energy infrastructure.