From Worst to First and Best to Cursed
Although the energy sector surged across the board in 2016, one group that lagged was MLPs — the master limited partnerships that still predominate among the midstream operators. The Alerian MLP Index (AMZ) was up 9% for the year. That wasn’t terrible, but it was well behind the rising energy tide.
Still, there were some outstanding performers among MLPs. According to my MLP database, which at year-end contained 132 publicly traded partnerships, 12 MLPs notched triple-digit gains in 2016. Here were the top 10 performers:
- EV – Enterprise value in millions of U.S. dollars, as of Dec. 31
- EBITDA – Earnings before interest, tax, depreciation and amortization, in millions for the trailing 12 months (TTM)
- FCF – Levered free cash flow, in millions
- CR – Current ratio, assets divided by liabilities
- 2016 Ret – Total shareholder return in 2016
Two of the top 10 performers, including the one with the best return, are hydraulic fracturing sand producers. These are notoriously volatile, with both of these MLPs ranking among the 10 worst performers in 2015. The 2016 champion, Hi-Crush Partners (NYSE: HCLP), lost 80% of its value in 2015, while Emerge Energy Services (NYSE: EMES) was the second worst performer in 2015 with a loss of 91% on the year. Had you owned either of these MLPs at the beginning of 2015, you would still be looking at substantial losses over two years despite the past year’s big rebounds.
The rest of the top 10 is a diverse bunch, with a couple of small coal producers (another of which was a bottom 10 performer in 2015), a coke producer (coke is a coal derivative used in steel production), several midstream operators and one upstream producer. Upstream partnerships were among the biggest losers in 2015, with Mid-Con Energy Partners (NASDAQ: MCEP) ranking among the 10 worst that year but in the top 10 for 2016.
Speaking of the worst, other upstream MLPs continued to produce big losses last year. The worst performing MLP of 2016 was an upstream producer, one of two upstream MLPs in the bottom 10:
But the refining sector actually had the most representation in the bottom 10, with three entries. Several of 2016’s worst performers were among the top 10 performers in 2015, including 2015 leader Alon USA Partners (NYSE: ALDW), CVR Refining (NYSE: CVRR), which had the third-best return that year, and 2015’s #8 StoneMor Partners (NYSE: STON).
All things considered, 2016 was a much better year for MLPs than 2015, when only a handful managed a positive annual return. The average performance of the MLPs in my database was 30.9% (which obviously includes great performers that are not in the Alerian MLP Index), a far cry from the average loss of 29.7% the prior year.
Given the tendency for one year’s winners to be the next year’s losers — and vice versa — readers may naturally wonder whether it’s time to ditch MLPs like Hi-Crush Partners and rotate back into refiners like CVR Refining. Join us at MLP Profits to find out, as we will be grading last year’s portfolio performance this month, and making any necessary adjustments to take advantage of what we believe will be significant opportunities in the MLP sector in 2017.