MLPs Bounce Off of Lows. Will It Last?

02/25/2016 9:31 am EST

Focus: MLPS

Michael Berger

President & Founder,

Although the MLP sector has bounced back over the last two weeks, Wall Street has not fully bought into this rally, so Michael Berger of examines two MLPs that—after the market closed Wednesday—announced earnings, since the market has not responded favorably to the results.

The rhetoric coming out of master limited partnerships (MLPs) has taken an interesting and concerning tone over the last few weeks. Recently, some partnerships started to provide information specifically related to their trading partners, as well as data pertaining to who owes them what and how much they are owed.

Midstream MLPs generate revenue by offering a variety of services to oil producers. The services offered by these partnerships range from the transportation of oil and gas through pipelines or railroads to processing oil and gas. Typically, all of these services are bundled together in a low tax manner that supports the dividends they offer investors.

MLP Index Bounces off of Recent Lows

During 2016, the MLP sector has seen heavy weakness and the Alerian MLP Index (AMZ) has fallen more than 15% during this time. The AMZ has rallied off of its recent lows and the index is up more than 21% since February 11.

Although the sector has bounced back over the last two weeks, Wall Street has not fully bought into this rally, especially after Saudi Arabia backed out of the production freeze agreement.

Earnings Season Heats up

After the market closed Wednesday, Energy Transfer Equity (ETE) and Energy Transfer Partners (ETP) announced earnings and the market has not responded favorably to the results.

While ETE beat Wall Street estimates, ETP missed estimates by 9%. The reason why ETE beat was mainly a result of higher than expected distributions from ETP.

The miss by ETP was due to weaker than expected results from its midstream segment and other segments. ETP reported better than expected results from its liquids transportation and services segment and its SXL segment, but this was not enough cover the miss by the other segments.

Market is Looking for Clarity

Although the earnings release was not overly negative, ETE and ETP are down 8% and 10% in pre-market trading. We believe this sell-off is more severe given the elevated level of uncertainty pertaining to a number of aspects of the fundamental story. These include the pending Williams Companies, Inc. (WMB) acquisition, leverage concerns, and distribution stability concerns.

We think the market might be somewhat disappointed with the fact that no meaningful announcement was made regarding a potential asset sale and 2016 guidance.

Michael Berger, Founder and President,

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