MLPs Continue Their Winning Streak

MLPs continue to be the best performing group in the markets during 2009. The Alerian MLP Index shot up and added to its gains in May:

• December 31, 2008: 176
• May 29, 2009: 226 (up 28%)

The comparable Alerian Index with reinvested income (reflecting two distributions) had even better results.

• December 31, 2008: 428
• May 29, 2009: 570 (up 33%)

The index slipped in early March along with the market but has been charging ahead, non stop, since then. MLPs are yield instruments and the rising index caused the yield to plummet from a record high of over 15% to only 9% yesterday.

But with gains comes worries. Other yield securities have also done well as risk aversion has been abandoned, especially since March. High yield (junk) bond funds have rebounded sharply from the depths when they yielded around 25%.

REITs have also recovered, but their recovery has flattened in recent weeks with a greater recognition that their high yields are accompanied by high risk. There have been dividend cuts, even at some of the strongest REITs. REIT stocks are feeling the effects. Junk bond funds continue to rise, reducing their yields.

However defaults are expected to rise which will reduce junk bond fund dividends.

MLPs are also yield securities with a very high 550 basis points yield spread above the 10 year Treasury bond yield (200 basis points had been considered a traditional spread). Optimism for MLPs is motivated by a lack of concern about how well distributions are covered (not to mention the basis for increases). MLPs have not had financial problems expanding their pipeline projects during the credit crisis.

Only a few MLPs have had to reduce distributions (so far) to help conserve money needed for debt reduction. Most have been able to extend debt and obtain additional financing for pipeline projects.

However, their ability to generate earnings for existing and higher distributions is more difficult to understand. Many MLPs reported lower earnings in Q1 which generally did not impact distributions because distributions are paid from distributable cash flow per unit, including depreciation and other non cash cash items, which is not reported.

There is a growing disparity between gains for MLPs and junk bond funds versus REITs struggling to make gains and Treasury bond yields which have risen dramatically. Something has got to give. Either high Treasury yields will recede or high yield securities will need higher yields (i.e. falling stock prices) to support a greater sense of risk.

Comments

[Ozarker:]

What's an REIT?

Jun 02 09:04 AM

[john s. gordon:]

real estate investment trust.
> jack

Jun 02 09:12 AM

[Smackdown:]

Avi, you continue to surprise me with your posts. I don't think you have a deep understanding of how midstream MLPs operate. Why are so concerned with earnings? DCF is what matters. You should study up on earnings, DCF, EBITDA, and the other factors that effect an MLP. Then, maybe you would stop posting positive yet worrisome articles. Embrace the solid business models and stop with the sky might be falling thinking out loud. Give specific reasons and not "something has to give". This is not very scientific. MLPS are not REITS or junk bonds. They do not have the same risks.

I stick to the midstream space. There has never been a single distribution cut in that area. Ever. Avoid the riskier G&P and E&P entities. Stay with the good names. Sleep at night. ETP, EPD, PAA, NS, TPP, DEP, TCLP, EEP, KMR, MMP, BPL, HEP, etc.....

Jun 02 07:51 PM

[THofler:]

My MLP portfolio has yield of about 9.8% relative to the basis, about 8.8% relative to its current market value. And the current unit value is threatened by a treasury yield of 3.6% for the 10 yr or 4.5% for the 30 yr???

Yes, the risk of the MLP is much higher, but the potential for future distribution growth is infinitely higher as well. I certainly don't have all my eggs in the MLP basket, but I've got zero eggs in the treasury basket & I don't see that changing anytime soon.

Jun 02 09:42 PM

[Wolverine58:]

Excuse my ignorance but what is an MLP?

Jun 05 01:36 PM

[Taymere:]

Master Limited Partnership, which is a tax structure.

Samckdown, is BBEP misdtream? They eliminated divvy. I bought them anyway though. I think EVEP is the best value out there right now, I'm shopping for some at $21 limit order.


On Jun 05 01:36 PM Wolverine58 wrote:

> Excuse my ignorance but what is an MLP?

Jun 10 07:10 AM

[Taymere:]

I saw in you other post that you are an MLP specialist. I would like to know what companies you think would be hurt most by the proposed anti-fracking law in currently in Congress? Would my BBEP or EVEP be hurt? What online sources or print media should I subscribe to to educate myself about MLP's? Currently I am using a free trial of SNL financial but their analyst coverage is thin for MLP's, Oppenheimer is all they offer for individual investors.


On Jun 02 07:51 PM Smackdown wrote:

> Avi, you continue to surprise me with your posts. I don't think
> you have a deep understanding of how midstream MLPs operate. Why
> are so concerned with earnings? DCF is what matters. You should
> study up on earnings, DCF, EBITDA, and the other factors that effect
> an MLP. Then, maybe you would stop posting positive yet worrisome
> articles. Embrace the solid business models and stop with the sky
> might be falling thinking out loud. Give specific reasons and
> not "something has to give". This is not very scientific. MLPS
> are not REITS or junk bonds. They do not have the same risks.<br/>
>
> I stick to the midstream space. There has never been a single distribution
> cut in that area. Ever. Avoid the riskier G&amp;P and E&amp;P
> entities. Stay with the good names. Sleep at night. ETP, EPD,
> PAA, NS, TPP, DEP, TCLP, EEP, KMR, MMP, BPL, HEP, etc.....
>

Jun 10 07:17 AM