Tuesday, August 19, 2008
We closed up 1 and a few pennies and near the highs of the day which is nice. Not bad in a horrible market. Also i've been noticing that a number of mlps seem to be putting in complex double bottoms. Now a bottom is a bottom until it either breaks down or breaks out. I will post a few of them tomorrow.
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joseph cioffi's Source Page - Associated Content
5 comments:
Joe,
Two bottoms are better than one.
GWB
Joe:
I don't understand why an increase in the cost of the energy commodities would benefit MLP's, most of whom transport the stuff. Demand destruction from higher energy costs would seemingly reduce the amount of the commodity being transported through the pipelines, which would hurt revenues and profits.
Lower commodity costs, on the other hand, would seemingly increase demand, cause oil and gas traffic through the pipelines to increase, and help revenues and profits.
Am I missing something here?
Patsfan
Great question. I am curious to hear Joe's answer. My guess is that the impact of energy prices affects different MLP sectors differently. Pure pipeline MLPs should be affected as you suggest, but gathering and processing MLP's do have varying degrees of commodity price exposure. E&P MLP's have even greater commodity price exposure.
Of course, hedging by individual MLPs can make these correlations fuzzy. Market-wide swings (such as the bear market in MLPs generally) can do so,too.
Bruce Sherman
Oakland, Oregon
i have often wondered if the price decline in mlps was due in part to demand destruction. If lower demand brings lower revenues then distributions can't grow...or will grow more slowly. And the pipeline buildout is being impacted by higher costs for steel. Just asK Boardwalk Partners.
The hedging question is a bit more obscure. In bull markets they would just shrug all that off. In bear markets they use it as an excuse to sell. Take a look at EV Partners which pre announced another 5 cent distribution increase to 3 dollars annual next quarter. The market chose to focus on the hedge loss and the stock is down 15% since the earnings news.
Bruce i think has it right when he says the reactions will be different. There is a pipeline capacity issue (not enoufh pipe out there) so i think demand destruction would have to be pretty extensive in order to have a broad impact on all pipeline companies. The hedging issue is further complicated if they un-do the hedges like Atlas Pipeline Partners (APL) did a few weeks ago and that apparently pissed off S&P and their ratings on the debt.
Nonetheless the bear market has put us in a place where yields are sitting almost 700 basis points above the 10 year which is a record. Seems to me that if we bottom in here (finally) there is lots of headroom for price appreciation. Of course if the 10 year yield rises on inflation pressures then the basis point spread could shrink with prices just going sideways.
Its a sick world kids!
Another thought: Many pipelines have inflation clauses tied to the PPI. At these inflation levels, the increased fees will more than offset the demand destruction, as MMP announced about a month ago. Yesterday could have been a reaction to the inflation news.
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