MLPs and Energy Play Opposites
Prior to the energy crash, the conventional wisdom about pipeline companies is that they only had indirect exposure to commodity prices. While that’s technically true, if your biggest customers are all energy producers eventually you’ll feel the pain too.
As such, investors in master limited partnerships (MLPs) have since become accustomed to checking the prices of benchmark energy commodities each day to see what the market might have in store for their holdings.
But while the movement of the Alerian MLP Index over the past year appears to loosely correlate with the price of West Texas Intermediate crude oil, that relationship appears to have come undone over the past month.
Earlier this month, MLPs rallied as energy prices swooned only to then swoon as energy prices rallied.
There are a few factors that may be in play.
Earlier this week, Goldman Sachs lowered its ratings on a handful of key midstream players, including Energy Transfer Partners LP (NYSE: ETP), Kinder Morgan Inc. (NYSE: KMI), Spectra Energy Partners LP (NYSE: SEP), and Targa Resources Corp. (NYSE: TRGP), so that may have driven the decline, especially in the wake of KMI reporting earnings.
Kinder is usually the first midstream company to release earnings each quarter, and its results can color market sentiment for its peers.
Although KMI beat estimates across most performance metrics, not everything was rosy. Management noted a key project, the Trans Mountain pipeline in Canada, could be delayed by nine months. That could underscore concerns about project execution and rampant NIMBYism for other pipeline companies.
Beyond that, some of the biggest MLPs saw their operations disrupted by three major hurricanes over the past six weeks. While things could have been worse, temporary shutdowns will likely weigh on third-quarter results. Investors could be lightening up on certain positions in anticipation of this outcome.
How each MLP reacts following its earnings release probably depends on the extent to which analysts lowered their estimates to account for these disruptions. A lower hurdle would obviously make for an easier beat.
Lastly, the yield on benchmark 10-year U.S. Treasuries has jumped sharply higher this month, as the prospect for tax reform and a new Federal Reserve chair come into focus. While most MLPs yield enough to stave off any near- to medium-term competition from Treasuries, they are still sensitive to fluctuations in interest rates.
Although this kind of action is unnerving, we don’t see any reason why the recent decline in MLPs should be more than a short-term slide.
In other news, The Blackstone Group LP (NYSE: BX) saw its units surge after third-quarter results blew past Wall Street’s expectations.
The private-equity powerhouse attracted nearly $20 billion of capital inflows during the quarter, pushing assets under management up 7% year over year, to a record $387 billion.
Distributable earnings grew 5% year over year, to $0.52 per unit. Based on that number, the board approved a distribution of $0.44 per unit.
Blackstone pays a variable distribution that targets 85% of distributable earnings, so its payout fluctuates every quarter depending on its financial performance. As such, while Blackstone’s units generally offer an attractive yield, you shouldn’t count on this security to deliver a consistent level of income each quarter.
The main driver of Blackstone’s performance this quarter was its $111 billion real estate segment, thanks to $3.1 billion of sales of seasoned assets, including most of its remaining stake in Hilton. As management noted, Blackstone’s original $6.5 billion investment in the hotel chain has now produced about $14 billion of profit, including $1.2 billion of unrealized gains.
Looking ahead, Blackstone continues to raise money for what it hopes will be the largest-ever infrastructure fund. The asset manager already has $20 billion lined up courtesy of Saudi Arabia and is looking to pull in another $10 billion before it starts deploying capital.
Blackstone plans to invest 70% of the fund’s assets in North America in areas such as energy, transportation, communications, water, and waste facilities.
Blackstone’s units have had an incredible run over the past year, but they remain reasonably priced compared to both its peers and the broad market.