Do the largest MLPs by market cap also have the most liquidity?
Not necessarily. This is one reason we adjusted the market capitalization numbers to include only units owned by the public. For instance, Spectra Energy Partners (SEP) has an adjusted market cap of around $3.5 billion, but a pure market cap of $13.7 billion. The difference is that the majority of the units are owned by parent company Enbridge Inc (ENB). SEP has a median daily trading volume of about $15 million worth of units. The comparison to market cap matters because compared to a market cap of $13.7 billion, $15 million isn’t much, but compared to $3.5 billion, SEP has normal liquidity in the MLP space. Still, even after the float adjustments are made, we find some anomalies.
Energy Transfer Equity (ETE) is the fourth largest MLP by adjusted market cap, just slightly smaller than Magellan Midstream Partners (MMP), which is number three. However, ETE had nearly double the trading volume of MMP over the trailing 30-day period. Even Plains All American (PAA), the seventh largest MLP, traded more than MMP.
What does it mean when trading volume and market cap are out of balance?
It’s important to remember that the trading volumes reflected in the tree map represent the trailing 30 days as of October 31, 2017. Many times, exaggerated (or muted) activity can simply be a result of an event specific to a particular company. For example, the last 30 days for ETE have been filled with news: ETE increased its distribution, priced debt, and announced project updates. PAA announced a distribution cut which was telegraphed in August. Both of these distribution announcements lead to increased trading: ETE following the announcement and PAA leading up to the ex-dividend date. In contrast, MMP had a relatively quiet month. It did announce a distribution increase, but since this was expected and in line with previous announcements, the market was not surprised.
These fundamental factors could be the reason for changes in trading volume. Alternatively, it could simply be that some MLPs are more hotly traded than others due to name recognition or unit pickers’ favorites. Or because active managers have chosen to trade in or out of a particular position that month.
No matter the cause, we always encourage MLP investors to know how liquid their investments are…which is why we like publishing visual data like this!