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Are You the Keymaster? MLP Issuers and Banks to Avoid

|Includes: DCP, Plains All American Pipeline, L.P. (PAA), TGP

So far this year, up until yesterday, buying into a follow-on equity offering by an MLP has been a losing proposition.  Aftermarket performance of all follow-on equity deals in 2011 has on average trailed the Alerian MLP Index in the first day of trading (T+1) by 0.5% and in the subsequent week (T+7) by 0.7% on average.  Those numbers have gotten worse lately, with deals since the end of June on average under-performing the MLP Index by 1.2% at T+1 and 1.8% at T+7.

Sidenote: I say "up until yesterday" above, because the latest MLP equity deal that priced Wednesday morning: a secondary sale of 7mm Breitburn Energy Partners ($BBEP) units owned by Quicksilver ($KWK).  BBEP units purchased in the overnight deal outperformed the MLP index by 11.78% today, by far the best performing equity deal since at least the beginning of 2008 (when my database begins).  Yesterday’s outrageous performance by BBEP is likely a result of institutions finally jumping into an attractive situation.  BBEP has carried a massive equity overhang for a few years, and today’s sale of KWK’s units removes that overhang.  So, while almost all of the facts were the same as the deal KWK did to sell 7.0 million units of BBEP in June of this year, including the lead underwriter, the net re-offer discount and the deal size, the aftermarket results were much better (so far).

Back to the point: on average buying into an overnight book-built deal (see the end of this post for definitions, some of the terminology is pretty specific) in the last 5 months has resulted in returns that are 1.8% less over the next week than if you bought the Alerian MLP Index.  That's unacceptable.

Is that deterioration simply a result of a volatile stock market?  Is there just limited interest from an investor pool that is terrified by weak domestic economy, gridlocked politicians, and the European sovereign debt crisis?  Why has institutional participation in equity deals fallen to almost nothing of late? If institutions aren't buying in these deals, who is?  What other factors could be at play here?

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