All that being said, it is somewhat surprising that the wholesale-related MLP stock prices are soft, despite decent margins and overall stable fuel demand and strong profitability. For example, CrossAmerica Partners LP (linked with CST) is down 29% from last year's high, strong Global Partners LP is down 26%, and Sunoco LP is down 38%.
Granted, equity supply continues, as indicated by the initial public offerings of GPM Investments and Empire Petroleum Partners. However, these are relatively small equity offerings of $100 million apiece, not normally enough to kill the overall equity side, unless the demand for these equities has tapered off considerably. What might be wrong with this seemingly good picture for downstream MLPs? Let me offer some possibilities:
?Oil prices. Should oil prices drop much further than now assumed by the marketplace, all downstream petroleum margins could suffer over time. Most vulnerable might be U.S. refiner margins, which are currently “to the moon,” because of the wide WTI-Brent crude-oil spread and the lunacy that U.S. producers cannot export their crude oil, yet U.S. refiners can export products at world-market prices--ah, heaven! Lower oil prices could impact margins in general as working capital requirements decline, and, more importantly, the 1% discount for prompt pay offered by branded refiners becomes worth less to middleman distributors. Perhaps Wall Street simply feels the “bloom is off the rose” for anything oil related for now.
Are purchase multiples too high? There has been spirited competition for M&A deals from MLPs, but equally from refiner-marketers such as Marathon/Speedway and Shell, as well as from many solid retail oriented players who want to use their strong cash flows and credit lines to expand, yet find organic growth too slow. Thus, there is a huge urge to merge by many players, as on Wall Street in general these days. MLPs have the absolute need to grow their dividends but, depending on their complicated structures, have quantifiable EBITDA multiple limits as to what they can pay and still have the acquisitions be accretive to earnings. And, as we all know, not all acquisitions work as planned, so the need can increase to acquire more to stay ahead of earnings. Many are fortunate because the interesting web of MLPs, general partners, sponsors, long-term financing vs. short-term financing, and lines of credit give them a smorgasbord of financing options while most interest rates are at historic lows. It’s a chief financial officer's best dream--or nightmare.
Interest rates. For whatever reason, unforeseen right now, might interest rates go higher than anticipated?
Selling pressure in the energy sector has been indiscriminate with major producers, service companies and pipelines deteriorating. A great deal of bad news is being priced in, not least since oil prices have so far failed to recover. An additional question on many minds will be whether Saudi Arabia will be more or less likely to continue to pump record volumes with the removal of sanctions on Iran.
An important consideration for pipelines is that they are paid on volume. This sets them apart from other sections of the energy sector. It is reasonable to expect that some higher cost producers will be put under pressure by the low price environment and may even go bust. Generally speaking one would expect such companies to be liquidated, sell-off ownership rights to their wells but that supply would not dip very much once the well is operational. As a result low prices are much more damaging to the owners of wells and the service sector. Additionally, the potential for refracking to boost supply from wells that have already passed peak production is a potentially bullish outcome for companies that rely on volumes.
The JPMorgan Alerian MLP Index has fallen aggressively since May and a short-term oversold condition has developed. It yields 6.11% but a clear upward dynamic will be required to check momentum and suggest a reversionary rally is underway.
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