MLPs in Q2: As Strong as Q1?

This has been an unusual year for MLPs. When it began, the Dow was dropping and MLPs went up. The Alerian MLP Index started 2009 with a 12 point gain on the first trading day and then continued in the 190-200 trading range while stocks began another bear market. Outperforming the Dow, especially with a large disparity, is always impressive. In late February and early March, MLPs were caught up in the selling and sank but recovered quickly, returning to the 190-200 trading zone. During the rebound period in the last 5 weeks, the index quietly worked its way back into the trading zone where it continues.

MLPs put in a very strong performance while stocks sold off badly but then lagged behind during the rebound. But YTD, MLPs are up while the Dow is still down (roughly 10%).

Earnings, distribution and guidance announcements are coming out. Today, Plains All American Pipeline (PAA) raised the Q2 distribution higher than the Q1 payment and completed the sale of $350 million in debt rated BBB with a yield of about 8¾%. They issued favorable guidance, indicating their finances are strong. Kinder Morgan (KMP), the largest MLP, declared a $1.05 distribution for Q2, matching Q1 and above last year. Despite headwinds, KMP reaffirmed the intention to pay $4.20 this year while they continue a multi-billion capital investment program.

The other MLPs will be reporting. Strong ones should have favorable reports and the weaker ones may have to cut distributions. MLPs remain strong offering high yields which are tax efficient. The yield spread over the 10 year Treasury bond is over 700 basis points when 200 has been consideration the common premium. Pipeline MLPS have solid assets which can withstand the test of time. Yields are high and their risk is less than with other high yield investments.

Comments

[epeon:]

I absolutely agree. I would note, however, that MRLPs are not just pipelines. I own ARLP, for example.

Apr 16 01:54 PM

[Smackdown:]

Avi, why do you continue to talk of dividend cuts? You should not say things like that without more specificity. Maybe some small cap G&P, but can you name the last midstream fee based pipeline to cut? Alarmist talk that flies in the face of the reality is one reason MLPs are still at tremendous historical spread. The evidence is for dividends either being maintained or increased. Case in point, EPD and DEP increased today. Case closed.

Apr 17 01:28 AM

[weiwentg:]

I think Avi was more or less on the money - the weaker, more leveraged MLPs may have to cut distributions like XTEX did. KMP's distributable cash flow dipped slightly and is now pretty near their actual distribution, so I wouldn't look for them to raise their payout this year.

However, I think the stronger MLPs, like EPD, ETE, TPP and KMP are good investments. They're all but certain to make it through the credit crisis and pay sustainable distributions. I think the market is waking up to MLPs.

Apr 17 11:34 AM

[searcher:]

Should nervous investors retreat from KMP over the quarter opportunity is knocking.

Apr 17 01:47 PM

[Smackdown:]

There is no bigger MLP proponent than me. If you search Avi's posts, he had a pretty pessimistic tone about a month ago. I maintain that the sector is one of the healthiest in the market and other than the leveraged small cap G&P stocks and E&P stocks (ie XTEX), there is nothing but opportunity. Talking about dividend cuts without specifically saying small cap E&P or G&P is alarmist. IMO. I only look at the midstream space and for me, the riskier issues do not exist. I am long EEP, PAA, ETP, EPD, TPP, DEP, BWP, TCLP, ARLP, KMR, and a little DPM (traded it a lot in the single digits).

I guess I would like to see more focus on the healthy and only passing mention of these several smaller MLPs that are at risk. After all, they are a very small percentage of the total and should not be mentioned in the same breath as the healthy ones.


On Apr 17 11:34 AM weiwentg wrote:

> I think Avi was more or less on the money - the weaker, more leveraged
> MLPs may have to cut distributions like XTEX did. KMP's distributable
> cash flow dipped slightly and is now pretty near their actual distribution,
> so I wouldn't look for them to raise their payout this year.
>
> However, I think the stronger MLPs, like EPD, ETE, TPP and KMP are
> good investments. They're all but certain to make it through the
> credit crisis and pay sustainable distributions. I think the market
> is waking up to MLPs.

Apr 17 10:38 PM

[Freya:]

WPZ, Williams Pipeline Partners, DD

Apr 17 02:44 PM