CS Take on MLPs
Weekly Analysis
MLPs Plunge 5.3% Last Week as YTD Return Goes Negative
MLPs Collapse: The Alerian MLP and Cushing 30 MLP Indices closed the
week down 5.3% and 4.9%, respectively versus losses of 5.4% and 4.3% for
the Russell 2000 and S&P 500 Indices, respectively. The 5.3% drop was
the largest one week decline for the AMZX since a 5.46% decline the week
ended August 5, 2011 and the 14th worst weekly pullback since the inception
of the index in January 1996. (See pg. 6 and 7)
MLPs Caught in a Perfect Storm: A perfect storm over falling commodity
prices, tightening fractionation/processing margins (though margins remain
well above historical averages), and renewed fears of a European banking
crisis combined to send MLP unit prices tumbling this past week. We
continue to believe that the overall fundamentals for the sector remain strong
but we are recommending that investors should overweight their MLP
portfolios with larger cap, more diversified MLP names such as KMP, EPD,
and PAA, as we believe that situation in Europe will likely get worse before it
gets better.
Key Takeaways from CS NGL Industry Update Call: Fundamentals
remain supportive for the entire value chain (E&Ps, MLPS and
Petrochemicals). The key underlying fundamental driver is a low natural gas
to crude oil price environment. Despite the recent decline in crude oil and
NGL prices, producers continue to benefit from the uplift provided by NGLs.
While processing spreads have declined from $12.40/MMBtu to start the
year to $8.17/MMBtu as of last week, spreads remain high from a historical
perspective having averaged only $5.50/MMBtu since 2003. That said, in
our view, the biggest risk to NGL fundamentals is further declines in the
absolute price of NGLs which may erode producer economics and further
reduce drilling activity. While we have not yet reached a tipping point, the
margin of safety has been declining. (Please see pg. 4 for more
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