Monday, February 25, 2013

Barron's MLP Article -- 25 Feb 2013

I noted to my audience on Sunday that I needed to read in more detail the Barron's article on the energy MLPs because they are fairly complicated as investments, and I wanted to get a better understanding of them before commenting.

Dimitra DeFotis wrote the Cover Story about these somewhat unusual (and variable!) class of stocks.

Most is us think of the energy MLPs as being a pipeline company, which acts more-or-less like a "toll booth" charging a little bit for transporting or storing natural gas (NatGas) or crude oil or gasoline.  These MLPs typically have yielded (although, technically and tax-preparation-wise they are NOT dividends, one of the many tricky little differences between MLPs and bonds and typical stocks) up to 6% or even higher.  Those high yields have attracted a lot of buyers, as well as a lot of new entrants into the energy MLP sector.

Alerian MLP (one of the big ones, also they do not require pesky K-1 tax forms...) has a nice ad noting that COW FLATULENCE is about 18% of world greernhouse gas emissions, and transportation's TOTAL is 14%...  Here is a a chart from showing recent daily movement in AMLP (click on image for a better view):

These new entrants are often NOT toll collectors however.  Many of them do not promise a fixed return, to the contrary, many of them return money to investors based on commodity prices (in the case of refining and "exploration & development" MLPs) and their overall corporate governance.  These have varied widely.

As she mentions in her article, the sector as a whole underperformed the S&P 500 last year., for the first time in 12 years they did so poorly (vs. the S&P).  The S&P was up about 16%, the Alerian MLP Index (ticker: AMZ, the 50 largest MLPs all rolled into one ETF I guess it is...) gained just 6%.

Ms. DeFotis brings in two experts who have at least roughly similar views on this sector (Kyri Loupis (Goldman Sachs) and Chris Eades (ClearBridge Investments -- they have four closed end funds in the sector)).  One thing they both made clear is that the energy MLP sector is quite variable in structure, assets and how they will perform depending on circumstances.

One of the easiest and most well known MLPs is Oneok ("one oak") Partners (OKS).  Chris Eades:

"It operates pipelines that gather, process and transport natural-gas liquids."

OKS seems to be typical for the old-style MLPs, charge them a nickel for every thousand cu ft (for example).  Oneok had ads on CNBC not too long ago, so some of you may have an idea of the company, they are mostly in Oklahoma and Texas.

Many MLPs are not valued by the P/E or EBITDA measures common with other stocks.  Eades says he looks at "distributable cash flow", which is EBITDA minus interest expenses (MLPs typically have large debts), capital spending (they do a lot of capital spending) and after the general partner is paid (shareholders are limited partners, paid after the general partner).  Eades also looks at the distribution coverage ratio which is the above distributable cash flow divided by the dividend to investors.  If that ratio is over 1.0, that means the MLP has a cushion...  That is something like other stocks that pay a dividend, if they pay a too high dividend (such that their cash flow cannot cover it), then the dividend is in danger...

Kyris Loupis plays a bit more in the newer style MLPs, especially the exploration and production sector.  These are examples of the new-style of energy ETFs, withvariable cash flows as they are not as predictable as the older ones (who have signed longer-term contracts).

Both Eades and Loupis think that the energy MLPs have a very good future as the US is investing BIG MONEY in oil & gas infrastructure.

Barron's author Michael Aneiro, their fixed income writer, also wrote a somewhat detailed piece explaining some of the differences between the different "flavors" (my term) of MLPs.

Below is a list of selected MLPs with a comment (the first block are Eades picks, the second Loupis' picks and the AMZ is an index for comparison):

Company Name
Oiltanking Partners
Eades likes their Gulf Coast exposure
Western Gas
parent co. adding more assets
Targa Resources
orienting more towards "old-style"
Oneok Partners
"old-style", it has been around
Access Midstream
a Kyris pick, "old-style"
MarkWest Energy
growth opportunity in Marcellus and Utica shales
Genesis Energy
BOTH like this pure-play on crude
Tesoro Logistics
spun-off from Tesoro, crude oil related
Delek Logistics
Nov 2012 IPO, underleveraged balance sheet
Alerian MLP Index
an index, for comparing with above


This investment sector is of interest to me, but it will require more work before I buy anything.  The yields are attractive, and they are "probably" set up well for the increasing energy infrastructure spending in our country.

I can certainly recommend purchase of the Barron's (dated 25 February 2013) just for the above Cover Story if this is of interest to any of you.

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