Archive for the ‘Midstream MLPs’ Category
Saturday, November 8th, 2008 |
The December issue of Kiplinger’s Personal Finance magazine has an interesting article on finding value in today’s current market. Specifically, the article mentions the rapid decline in commodity prices (such as natural gas) as speculators flee investments in the energy market due to weak demand.
As a result, some pipeline companies (which actually have limited exposure to these prices) have unduly suffered. For example, Crosstex Energy LP (XTEX) has fallen over 70% since July - even though it has continued to grow cash distributions to investors. While it had a rough 3rd quarter due to major Hurricanes, at a price of $8 Crosstex has a whopping 25% distribution yield! However, I like to see a coverage ratio close to 1.3x - Crosstex is below this benchmark with a coverage of around 1x. Still, bottom line is the same - the market is likely undervaluing some of these companies as commodity prices fall.
Posted in Midstream MLPs, Natural Gas | No Comments »
Saturday, September 27th, 2008 |
Barron’s published an interesting interview with Jay Rosenberg, manager of the First American Global Infrastructure fund. According to Rosenberg, pipelines and infrastructure related companies are attractive in the current economic environment because they offer stable cash flows. Specifically, Rosenberg says:
…we are generally much more focused on those companies that transport petroleum — both crude refined products — and natural gas. But they do so in a way that is very contractual in nature and where their earnings don’t fluctuate very much based on the volumes that they are shipping. The company that best typifies what I’m talking about would be Enbridge (ENB), in particular because of the contractual nature of its gas load. Another company that we like in is Kinder Morgan …whose institutional shares (KMR) we own. Kinder Morgan has a fantastic portfolio of pipeline assets but also has some of the best unique storage assets in the US…
Related Links:
Barron’s Article (subscription may be required)
Posted in Energy, MLP Investing, Midstream MLPs | No Comments »
Saturday, September 20th, 2008 |
One of the largest MLPs in existence today is Houston based Enterprise Products Partners. As measured by enterprise value, EPP is second only to MLP bellwether Kinder Morgan at $21 billion. However, from a liquidity standpoint (the ability to trade LP units on the open market - a key concern of many investors) it bests Kinder Morgan with an average of 560K units traded daily.
Overview
Like many of its peers, EPP is focused on providing midstream energy services to natural gas, natural gas liquids (NGL) and crude oil producers and consumers. Its primary method of doing so is its extensive network of pipelines (both offshore & onshore) which span over 35K miles in length. However, a key differentiator is its ability to tie import / export of NGLs with domestic and international consumers. In fact, NGL has become a very profitable business for EPP, with over half the partnership’s gross operating margin derived from NGL pipelines and services.
The Numbers
Investors like consistency, fiscal conservatism, and cash - and EPP seems to fit the bill with all 3. The partnership has grown cash distributions to LP unitholders at an annual growth rate of 9% per year since 1999, and grew total assets at a 39% CAGR during the same period.
Jan - June 2008 operating margins grew at a double digit pace vs. 2007 with strong performance across all pipeline business segments. Further, distributable cash flow (DCF) grew 41% in 1H ‘08 vs. 1H ‘07 to $730 MM, and the amount of retained DCF grew over 4X to $212 MM. This gives the partnership a comfortable coverage ratio of around 1.47.
In Sum
I don’t issue buy or sell recommendations for any type of security. However, I like EPP and will continue to watch this company as it pursues more projects and grows in the midstream energy space.
Posted in MLP Investing, Midstream MLPs | No Comments »
Friday, August 8th, 2008 |
The Master Limited Partnership (MLP) has two key components. At the core of the MLP is the General Partner (GP), which actually runs daily operations (e.g., physical management of a pipeline, billing, accounting, etc.) Limited Partners (LPs), on the other hand, are passive investors in the business and have no part in daily operations. The goal of the GP is to grow cash distributions (similar to a stock dividend) to the LPs and, since most MLPs operate in the energy space, these distributions tend to grow steadily over time. (more…)
Posted in MLP Investing, MLPs, Midstream MLPs | No Comments »
Sunday, August 3rd, 2008 |
Many investors assume, incorrectly, that fluctuations in oil & gas prices can significantly impact MLP unit prices. However, the truth is that revenue from MLP assets (the majority of which are pipelines) is generated from a “toll road” model. That is, it doesn’t matter how expensive the commodity shipped is - it only matters how much of it gets shipped. Of course, high (or low) prices can impact the amount shipped - but energy demand has been growing fairly consistently over time.
A good analogy is, unsurprisingly, an actual toll road. It doesn’t matter if 100 Honda Civics use the road or 100 Aston Martins - the same toll is collected and, consequently, the same amount of revenue.
Posted in MLPs, Midstream MLPs | No Comments »
Monday, October 29th, 2007 |
Boardwalk Pipeline (NYSE: BWP) posted higher Q3 results Monday. Net income rose to $40 million ($0.35 per common unit) vs. $30.6 million in Q3 of last year, beating analyst expectations of about $0.28 per unit. The MLP also declared an increase in distributions to $0.45 per unit, which is about 16% higher than Q3 of 2006. The BWP earnings call is scheduled for 9 AM EST and can be found at the link below.
Related Links:
BWP Q3 Earnings Call
Posted in Midstream MLPs | No Comments »
Wednesday, October 24th, 2007 |
Kinder Morgan announced its 30th distribution hike since 1997, increasing distributions to LP unitholders 9% to $0.88. This puts the MLP on track to exceed its annual budget for cash distributions of $3.44. Further, KMP expects the Rockies Express - West pipeline to begin service on Jan. 1, 2008. The project is part of a broader trend toward developing midstream assets in the area, as MLPs seek to capitalize on the lack of existing pipeline infrastructure.
Posted in Midstream MLPs | No Comments »
Monday, October 22nd, 2007 |
Houston based MLP Plains All American Pipeline LP (NYSE: PAA) announced a quarterly distribution increase of $0.09 to $0.84 payable on November 14, 2007. The increase represents a 12% growth in distributions to LP units (vs. November 2006), and is the 14th consecutive distribution increase by the partnership. This brings 2007 quarterly distributions to $3.28 per unit, and will put the MLP above its annual distribution increase target of 14%.
Posted in Midstream MLPs | No Comments »
Sunday, October 21st, 2007 |
One of the largest MLPs, Enterprise Products Partners LP (NYSE: EPD), increased its quarterly distribution almost 7% from $0.46 in Q3 2006 to $0.49 in Q3 2007. According to the CEO, Michael Creel, it is the MLP’s 22nd distribution increase since its founding in 1998. The announcement comes ahead of EPD’s Q3 earnings announcement and subsequent analyst call on October 25th.
EPD provides a variety of midstream services including oil & natural gas transportation, gathering, processing, storage, as well as natural gas liquids (NGL) fractionation. The Houston, Texas based company has a market cap of almost $14 billion, and an enterprise value (EV) of almost $19 billion.
Related Links:
Enterprise Products Partners Homepage
Posted in MLPs, Midstream MLPs | No Comments »
Friday, October 19th, 2007 |
Tortoise Capital, a leading MLP investment and portfolio management firm, offers several practical reasons why Energy Infrastructure Master Limited Partnerships have a bright future. They make some brief, yet compelling points - I have summarized and expanded upon them below:
Income & Growth Upside
Energy Infrastructure MLPs distribute most of available cash flow to LP unitholders. As their earnings increase through organic and acquisition growth, distributions to investors will continue to grow. This is especially true as larger petroleum companies sell off midstream assets to MLPs (which purchase them at favorable valuations).
Stable Cash Flow
MLPs typically operate in the midstream energy space (transport via pipeline, etc.) which is a fee-based model. That means in boom or bust cycles they will generate cash flow even with fluctuating commodity prices. What does that mean in layman’s terms? If the economy is in a slump or booming, and whether oil or natural gas prices are high or low, these commodities will still need to get from point A (the well) to point B (the customer).
High Barriers to Entry
If you’ve ever taken a business or economics course you are probably familiar with this one. A high barrier to entry means that potential competitors will think twice before attempting to enter a market, because market entry requires significant spending. This makes sense: it takes a lot of capital, time, and skill to build and operate pipelines and other midstream assets.
Big Institutions Have Been Slow to Invest
Because of several different tax implications, larger institutions have been slow to invest in the MLP space. Mutual funds have avoided them because of timing issues with tax filing, while pension funds, endowments, etc. want to avoid the tax implications of “unrelated business taxable income” or UBTI. Bottom line: these don’t impact individual investors as much. However, if and when these larger players enter the market current investors should benefit from increasing market capitalization.
Posted in MLP Investing, Midstream MLPs | No Comments »
