MLPs in 2009: Fundamentals Remain Strong

While the stock market got a bad start this new year, MLPs have done much better. The Dow is down 6% YTD. But the Alerian MLP Index, even after a 12 point surge on the opening day of trading in 2009, is up 3% to 194 and has been sticking very close to the 195 line. MLPs, as high yield securities, may be benefiting from greater investor interest shown for high yields.

However, MLPs may be going through trying times. The recession is biting hard and maybe for MLPs in ways we can't fully assess. Already distributions, which are key to their valuations, are bringing mixed messages. Mixed is a metaphor for cuts, a new phenomenon for MLPs. A dozen MLPs are selling in single digits with extraordinary yields (20%, 30% and even higher).

One of those, a smaller MLP, Constellation Partners (CEP), recently cut their annualized distribution 77% from $2.25 to 52¢. Ahead of the news, the units had sold off to 2½. A few days after the news it virtually doubled, then pulled back to the lower 3s. Even at yesterday's price, its yield is heading back to 20%. But a few others have increased or at least maintained distributions.

Kinder Morgan (KMP), the largest MLP, recently raised $900 million in financing (units and debt) followed by slightly higher market prices. They just announced the next distribution would be paid based on a $4.20 annual rate, up from a $4.08 rate in the last quarter. While their guidance was encouraging, KMP expects to pay distributions of $4.20 in 2009 (i.e. no further increases). In the next two weeks, the remaining MLPs will announce Q1 distributions. It will be interesting to see what influences the MLP index, the good news on distribution hikes or the bad news about cuts.

Most MLPs move oil and gas. With low prices for oil, not to mention other fuels, it is difficult to assess their impact on MLPs. MLPs just move oil and gas through their pipelines, they are not directly impacted by sharp declines in commodity prices.

For instance, I have followed Enbridge Partners (EEP). They move oil and gas, but the oil (called liquids) is most interesting for me. They bring shale oil from Alberta, Canada, down to the upper Midwest and to eastern Canada. Shale oil makes Canada the top source of imported oil for the US, but it's also high priced. Those high prices may pinch Canadian producers, meaning less oil sent through the pipelines at the same time Enbridge is undergoing a major expansion for its oil pipeline capacity. These kinds of worries may not be much different than the uncertainties most companies are going through. But long term prospects for the industry are still quite good as the US needs more pipelines to move energy around the country.

Fundamentals remain strong for MLPs. They have good track records of growth, high yields and a history of raising distributions. This year is starting off very bumpy for the US economy, which adds uncertainty to MLPs. But for investors with long term horizons, strong MLPs offering high yields should help investors get through a difficult year (or longer if needed). After 13 years, the index has almost doubled (and that measure is hurt by a depressed value today). Including reinvested income, the index has grown to more than 4X (equivalent to a 11½% compounded annual growth rate). High yields and excellent growth prospects makes for very smart investing.

Disclosure: no positions

Comments

[mplaut:]

In addition to MLPs that move oil and gas, there is another whole class called Exploration and Production MLPs that actually produce oil and gas. They are also distribution oriented, and seek mature, low depletion properties that produce steadily. Many have decades worth of reserves. When you add the fact that they hedge their future production for years ahead, you get very solid, income producing companies. With yields north of 15%, there are certainly few if any other investments that promise such high and steady gains.

In the markets over the next few years, it is going to be hard to make significant money from capital gains. You may not make a "killing" from income stocks, but you will be amply rewarded.

Disclosure: long LINE

Jan 23 03:35 AM

[zorro6204:]

Yes, and also several MLP's like MWE and APL are engaged in midstream businesses which move and process gas, rather than producing it. But their revenue streams are based on commodity prices nevertheless, due to being paid in NGL's or by buying and selling. You can't bunch these all together, each has its own characteristics. EROC is a hybrid, VNR is like a royalty trust, WPZ is primarily fee based, etc. etc.

Jan 23 11:32 AM

[searcher:]

Where else can you be paid to wait in line? Just make sure your billfold isn't lifted when your jostled by the crowd. Most are priced due to fear of diminishing income to support the distribution. Many buyers even expect some of these to reduce payouts. It is the range of the expected reduction that matters. If I buy a 20% yield with the expectation that distributions will be halved at worst, then I'm willing to buy more, or at least hold, when the market dips at the 'inevitable' dividend cut. Of course, reality doesn't necessarily defer to my expectations.

Jan 23 11:56 AM

[Ineedhelp:]

Help;

How do I specify in a self directed brokerage account that I want to buy
" I unit shares " of Kinder Morgan or Enbridge?
I want to avoid the tax hassles of MLP investing.

Also, is there any ETF or Mutual Fund (open or closed end) that invests in MLPs ; again, so that I avoid the tax hassles of MLPs.

Is there any way to invest in an index fund that tracks the ALERIAN MLP INDEX??

Your help will be appreciated.

I have to believe ( I hope ! ) that I am not the only one trying to find this stuff out.

Feb 15 01:07 PM