MLPs
slightly underperformed in February
2016
In
February 2016, MLPs underperformed the S&P 500 by 0.3% versus historical outperformance
during the month of 0.4% since
1996. YTD as of 29
February 2016, AMZX produced a total return of (11.5)% versus
(5.1)% for the S&P 500.
MLPs experienced a rough start to February 2016 amidst mixed 4Q15 earnings and guidance announcements and
news at several large cap MLPs
(see: Another twist in the ETE saga and GP support, but now with a lowercase 's'; PO to
$26). However,
the sector rebounded towards February month-end on the back
of strong crude oil prices and credit markets rallying. We expect MLP sector
volatility to persist given the
current commodity and production
outlook and believe investors
will continue to focus on MLP leverage, funding needs, counterparty
risk, and cash distribution
policies.
Lower
medium-term growth capex a silver lining
Along with
4Q15 earnings, many capex-heavy MLPs with leverage and funding concerns have
meaningfully lowered 2016 growth capex (see slide 17), with near-term capex
mostly focusing on completing current committed projects under construction
and incremental "demand-pull" projects
that are less sensitive to the decline in commodity prices. We view lower
medium-term growth capex as a potential silver lining in the current commodity
and MLP capital markets environment given lower associated funding needs, incremental leverage, and
execution risk. In addition, we note many MLPs have secured funding for
near-term growth capex
via traditional capital markets
prefunding, alternative financing means (preferred equity), and/or GP support.
We expect sector growth capex to continue to trend lower in 2017 in the
absence of a sustainable recovery in commodity prices and producer activities
and capex (see: The MLP Maven).
MLP
rebounded on improving credit markets
The credit
markets remained volatile but performance meaningfully improved in late
February, particularly in energy. Midstream credit outperformers included ENLK and WPZ on the back of
relatively positive news from credit rating agencies (see: The MLP Maven). We continue to believe credit rating agencies will remain relevant and a recovery in debt prices could allow for better MLP equity valuations.
Non-institutional investors - trying to
call a bottom?
Recent fund
flows and AMLP shares outstanding data (see slide 20 and 21) may indicate
non-institutional investors are trying to call a bottom in the
MLP sector, in our opinion. We
generally use AMLP shares outstanding as a decent proxy
for non-institutional investor sentiment. YTD, AMLP shares outstanding have been steadily increasing while AMLP short interest has
declined, implying the increase in shares outstanding was most likely due to
growing non-institutional investor interest instead of institutional investors
creating AMLP shares to short. In
addition, MLP open-end funds
(OEF) also saw increased net inflows in February 2016.
MLP sector
update
We recently
published an MLP sector update note, adjusting ratings for a number of MLPs
and MLP CEFs under coverage
and introducing a general risk framework for most MLPs under
coverage (see: Malaise, Loathing, Pessimism: credit and commodities
still in charge).
Updated
Energy MLP presentation for
March 2016
If you would like a pdf version of this
presentation with one slide per page, feel free to contact us.
