Some Bright Spots in the Gloom
In last week’s MLP Investing Insider, I covered last year’s top performers among the publicly traded partnerships. Refining MLPs shone thanks to plummeting oil prices and a crude export ban that allowed them to buy oil on the cheap and export the refined fuels made from it.
Crude oil prices are certainly still depressed, but I don’t think they will stay below $40/bbl all year. Further, the crude oil export ban that so greatly benefitted refiners during the shale oil boom is no more.
Thus, while I think refiners will still perform well as long as crude oil prices remain depressed, there is a lot more downside risk in the sector than there was a year ago. So I think it’s unlikely that refiners will repeat as top performers in 2016.
Who might this year’s winners be? It’s early of course, but we can look to fourth-quarter returns for some guidance as to which partnerships had momentum at the end of last year. Bear in mind that it was an abysmal quarter for most MLPs.
- Q4 2015 Return = Q4 2015 equity return including distributions
- EV = Enterprise value in millions as of Jan. 11, 2016
- EBITDA = Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM), in millions
- Debt/EBITDA = Net debt at the end of the most recently reported fiscal quarter divided by TTM EBITDA
- FCF = Levered free cash flow for the most recent fiscal quarter, in millions
- Yield = Annualized yield based on the most recent quarter’s distribution
Note that 8Point3 Energy Partners (NASDAQ: CAFD) conducted its IPO in June, so its data is only for part of a year. Also, note that its data is for Q2, while the rest of the list which shows Q3 free cash flow.
Three of the companies on the list — CAFD, Enviva Partners (NYSE: EVA), and Green Plains Partners (NASDAQ: GPP) are all involved in renewable energy and are thus likely to benefit from rules adopted late in 2015. This includes not only the spending bill that extended tax credits for renewable energy last month, but also the Environmental Protection Agency’s decision to raise quotas for ethanol that must be blended into the gasoline supply above previously proposed volumes.
The other pattern is that several of the standouts are high-growth partnerships with well-capitalized sponsors. This category includes Shell Midstream Partners (NYSE: SHLX), Phillips 66 Partners (NYSE: PSXP), Columbia Pipeline Partners (NYSE: CPPL), Antero Midstream Partners (NYSE: AM) and Spectra Energy Partners (NYSE: SEP).
Of the group, SHLX and PSXP are the most expensive, but they clearly benefit from their sponsor’s name recognition and large inventory of assets that can be sold to the affiliated MLP.
The worst performers in Q4 were the beaten-down oil and gas producing partnerships. Those that manage to stay solvent should rebound as oil prices recover, but there is still significant downside risk in the group. Bankruptcy may loom for some. As always we will attempt to identify momentum shifts in MLP Profits this year as we strive to stock the portfolios with 2016’s big winners.