Master limited partnerships (MLP), as measured by the Alerian MLP Index, were barely in the black for 2012. And what gains they did make were basically thanks to paying robust distributions, as unit prices were actually mostly underwater.
The biggest negative for the sector has been the threat of sudden austerity in the US. Even midstream energy MLPs would likely see less business development activity should the world suddenly dip into recession. That would most likely take the form of cancelled or rolled back projects rather than reduced current revenue. But the result would still be slower cash flow and distribution growth.
Meanwhile, energy producer MLPs and other companies affected by margins - i.e., commodity prices and the differences in their selling prices - could see a direct hit to sales that aren't hedged. That's because energy prices would also be a victim of slower growth. In fact, we've seen some weakness already here too that will have an impact on fourth quarter results for some.
As their performance in 2008 proved, even a severe economic shock in 2013 would not derail MLPs that have continued to practice conservative financial and operating strategies. If anything most managements were even more risk-averse than usual in 2012, as worries about economic growth and energy prices have grown.
That means once the markets do get a handle on the damage sudden austerity in 2013 will do, we can look forward to a recovery. And in the meantime I'm confident that MLPs will continue to make secure distributions and even generate payout growth. (Read my energy outlook for 2013 for more.)
Below are three MLPs I think investors should be watching this year.
Kinder Morgan Energy Partners LP (KMP) priced a secondary offering of 3.9 million units at $78.60 per share. Spectra Energy Corp (SE) is buying Kinder Morgan Energy's one-third stake in the Express-Platte Pipeline System for about $380 million in cash. Kinder Morgan's joint venture partners in Canada - the Ontario Teachers' Pension Plan Board and Borealis Infrastructure, the infrastructure investment arm of the OMERS pension plan - are also selling their interests in the pipeline system.
Spectra Energy is paying $1.25 billion in cash and taking on $240 million of debt to fund the transaction.
For 2013 the Kinder Morgan is targeting a distribution of $5.28 per unit, supported by total segment earnings of more than $5.4 billion.
The company also expects to generate excess cash flow of at least USD30 million. Kinder Morgan's 2013 growth forecast is USD2.8 billion, which excludes dropdowns.
Parent Kinder Morgan Inc (NYSE: KMI) expects to drop down its remaining 50 percent interest in the El Paso Natural Gas pipeline system and 50 percent of its midstream assets to the MLP during the year.
Magellan Midstream Partners LP (NYSE: MMP), which generates 85 percent of its cash flow from fees, is targeting distribution growth of 10 percent for 2013.
Magellan's and Occidental Petroleum Corp's (NYSE: OXY) BridgeTex Pipeline, a 50-50 joint venture, is scheduled to be placed into service by mid-2014 and is expected to generate a return of eight times earnings before interest, taxation, depreciation and amortization (EBITDA) based on currently committed volume. The pipeline's cost for Magellan is estimated at $600 million.
The Crane-to-Houston pipeline reversal's 225,000 barrels per day capacity is fully committed and scheduled to begin initial service by early 2013, with full service by mid-2013. The $375 million project is expected to generate a return of three times EBITDA.
Although Magellan currently generates only 10 percent of operating income from crude oil assets, approximately 85 percent of 2012-to-2014 organic growth capital and 80 percent of $500 million of potential expansion projects are crude oil-related.
Targa Resources Partners LP (NYSE: NGLS) added $200 million to the $400 million private placement of 5.25 percent notes due May 2023 that it announced in October.
The placement closed in mid-December. The in-demand notes were priced at 101 percent of the principal amount to yield 5.093 percent.
Management will use proceeds from the placement for general purposes, which could include meeting working capital requirements as well as funding acquisitions.
Disclosure: I am long SE.