Is the Trend Changing for MLPs?

Joseph Cioffi  |

Master Limited Partnerships have been a wonderful leading indicator for the past three years. Since its December 2008 low, the index has moved up from 145 to 410. But the index hit a wall back in January when it hit 410, and we have not been able to get back there since. After a first run down to 380, we saw the index make a run higher, only to be turned back at 400. Now we are back to 380 and went below it yesterday. This move down is coupled with a weaker market overall and European woes, which seem to be building up again to levels not seen since last summer. The index is telling us that this is, at the very least, a serious correction that is getting underway. The break below 380 to me says we will see a trip back to 360. If that goes, its back to last September’s lows around 320.

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In this downdraft we have seem some MLPs get their legs taken out from under them. Alliance Resource (ARLP) went from $80 to $50 and is now hovering just under $60. Buckeye Partners (BPL), which was among the MLP underperformers to begin with, is now below $50 from the low $60s. The new MLP debacle de jour is Copano Energy (CPNO), which had run from $26 in October to $37 back in late February. Then came the MLP correction and last week we got underwhelming earnings with two notable issues. The first is the news of operational problems at Eagle Ford Shale. The other, and more importantly, is distributable cash flow, which was at 0.79. We know that anything under 1 is not good. The chart of Copano reflects this.

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The stock has been in free fall ever since last week’s news and we are back down near last fall’s lows. Falling knife catchers of course can stand and try. I'm inclined, as with Buckeye (BPL) and Alliance (ARLP), to stand back and let the correction play itself out. The DCF issue at Copano and Buckeye, as well as Nustar (NS), could work itself out over the next couple of quarters as seasonal issues exert their forces. But given that the overall market tape is looking weak, it might be better to stand aside, or if investors are still inclined to buy, focus on the big boys in MLP land that continue to raise payouts.

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