Thursday, December 7, 2017
MLPs and Merger & Acquisition (M&A) Activity - What’s Next?
Source: Observations from the Executive SuiteBy Jeff Kramer, Managing Director, NRC Realty & Capital Advisors
The last two months have seen more pressure on MLP stocks, down about 10%, until recovering about half that loss this past week while the technology led stock market has steadily marched on to new highs. The softness is surprising, since oil prices and refining and marketing margins have been strong, which historically benefitted MLP stocks. The Trump Tax Bill is not helpful, since the tax deferral benefit is less beneficial at lower tax rates. And the growing trend of the elimination of IDR's, or Investor Drawing Rights, typically important incentives for MLP growth, is drawing attention and uncertainly to the MLP stock market space.
Generally, the more downstream related MLPs, like MPLX LP (MPLX, Marathon's downstream MLP), Global Partners LP (GLP), Sprague Resources LP (SRLP), have been more stable than their upstream brethren, but remain very depressed relative to values of two years ago. It is critical to remember the importance of MLP stock prices, as they clearly led the upward march of convenience store/gas station M&A multiples since 2009. The crazy very high M&A multiples have been slipping since the MLP stocks peaked. The MLPs need solid stock prices to issue stock for acquisitions.
The stock market overall looks toppy after a great rally, at least for a decent sized correction, especially with political uncertainties and rising interest rates. Yet depressed non MLP oil stocks have recovered some relative to the rest of the market. The Major International Integrated Oils love the pickup in worldwide economic growth to help their refining and trading profits. Producing companies with good drilling prospects are benefitting with the better crude price. Refiners are doing very well. And convenience store public retail companies have recovered with other retailers as everyone sees a good consumer oriented Christmas for now, and without any new Amazon headlines. The stock price uptrend is in spite of very soft or nonexistent growth from US same store sales and fuel volumes, except perhaps for those with solid foodservice programs. Are soft MLP stock prices leading the market again?
The $64,000 Question (remember that show?) is how long will this economic nirvana persist? Anyone's guess at this point, but some warning signs are appearing. Perhaps one of the larger ones is that the yield curve has flattened to levels not seen since 2007. This is most clearly shown by the yield spread between Two Year Treasury Notes and Ten Year Treasury Notes. What it says is that the US Federal Reserve is raising short term rates to more 'normal' levels with the strengthening economy while overall inflation expectations remain quite subdued as represented by the Ten Year Note. And despite the fact the Trump led tax bill dramatically increases the Federal deficit, at least in the short term. The flattening yield curve is an early economic indicator, but definitely worth watching. And watch the MLP market for continuing trends in M&A price multiples.