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Introduction

I wrote my first articles about all the publicly traded midstream players of the U.S. and Canada in late March 2013. I separated them into three groups, judging them by their market cap. I determined that the intermediate players were those with market caps from ~$5 billion to ~$15 billion. The small players had market caps below $5 billion and the major ones had market caps higher than $15 billion.

In those articles, I also provided my bearish and bullish calls along with the reasons that supported these calls. To me, stocks are not birds to be bought when they fly high. This is one of my investing principles that has saved me a lot of money during the last 25 years. I prefer the bottom fishing bets instead, when they are coupled with good fundamentals.

In the first part of this series, I discussed my bullish calls. My article is here. In the second and third parts, I'll discuss my bearish calls.

The Yields

As I have noted more than once, I am not a momentum trader. I never chase prices or force any investment. I always wait for the right moment dictated by either price or market condition to pounce. In my opinion, this is the best way to get significant returns on my investments, beating by far the performance of the major indexes (i.e. S&P's 500, Dow Jones Industrial Average, Nasdaq Composite and Russell 2000).

To give you an idea about my bullish picks, I was long on Surge Energy (OTCPK:ZPTAF) and Rock Energy (OTCPK:RENFF) with an average buy at ~$3 and $1 respectively. Both stocks have yielded ~90% and ~30% since my calls.

To give you an idea about my bearish bets, I was bearish on James River Coal (JRCC) that has gone from $3.5 to $2, the bankrupt GMX Resources that has gone from ~$7 to $0.2 and Africa Oil (OTCPK:AOIFF) that has gone from $10.5 to ~$7 since my respective calls. Some of my articles related to all these calls are here, here, here and here.

Four months have passed since the articles about the midstream players were syndicated and it is a good time to check out the performance of my bearish and bullish calls. I will also provide the latest developments along with my updated opinion on these companies.

1) Bullish Calls: After analyzing 45 companies (major, intermediate, small), I was neutral for most of them. I concluded that only four companies complied with my buying criteria. Finally, I recommended the following firms: Enbridge Energy Partners (NYSE:EEP), Spectra Energy Partners (NYSE:SEP), Spectra Energy (NYSE:SE) and Sunoco Logistics Partners (NYSE:SXL).

Picking only 4 out of 45 companies might look strict to some investors, but I feel responsible for my publicly available stock picks. I always try to eliminate the potential risk by rejecting fundamentally weak or overvalued companies, and this is why I did not recommend the remaining 41 companies. I believe that the midstream sector is full of significantly overvalued companies because many investors bite the bait of the inflated distributions. My articles with these bullish calls are here, here, here and here.

I was bullish on the aforementioned four companies because:

A) They had above average operating margins.

B) Their debt and cash flow ratios (Debt/EQ, EV/CF, Debt/CF) were lower than their peers'.

C) Technically, the stocks were in a consolidation phase.

After all, let's check out the performance of these stocks at the table below:

Company

Price 1

Price 2

Yield

Enbridge

Energy

Partners

~$28

$32.83

~18%

Spectra

Energy

Partners

~$37

$45.88

~24%

Spectra

Energy

~$30

$35.61

~19%

Sunoco

Logistics

Partners

~$64.5

$63.99

~0

Price 1: Price on the date when the stock was recommended for the first time.

Price 2: Price today.

The total yield of this bullish portfolio is 15.25% currently. In other words, each stock gained 15.25% on average. It is so good to see that this hypothetical portfolio recorded a satisfactory average gain in four months.

2) Bearish Calls: Let's check out now the performance of my bearish calls. The articles with these bearish calls are either above or here, here and here.

I was bearish on these 10 companies because:

A) They had below average, single digit operating margins.

B) Their debt and cash flow ratios (Debt/EQ, EV/CF, Debt/CF) were much higher than their peers'.

C) Technically, the stocks were in an overbought phase.

After all, let's check out the performance of these stocks at the table below:

Company

Price 1

Price 2

Yield

ONEOK (NYSE:OKE)

~$48.15

$43.17

~(-12%)

ONEOK

Partners (NYSE:OKS)

~$57.25

$50.67

~(-12%)

Regency

Energy

Partners (NYSE:RGP)

~$25.55

$28.69

~12%

NuStar

Energy (NYSE:NS)

~$54

$45.40

~(-16%)

Targa

Resources

Partners

(NYSE:NGLS)

~$46.4

$53.17

~15%

MarkWest

Energy

Partners

(NYSE:MWE)

~$61.3

$65.81

~7%

Targa

Resources

(NYSE:TRGP)

~$68

$68.48

~0

Energy

Transfer Equity

(NYSE:ETE)

~$57.8

$64.65

~12%

Plains All

American

Pipeline (NYSE:PAA)

~$56.8

$56.43

0

Williams

Companies

(NYSE:WMB)

~$38.1

$33.82

~(-11%)

Price 1: Price on the date when the stock was recommended for the first time.

Price 2: Price today.

The total yield of this bearish portfolio is (-0.5%) currently. In other words, each stock has lost 0.5% on average since my bearish call. So it is pleasant to see that this hypothetical portfolio recorded a very small gain in four months. However it must be noted that most of the ten stocks above have dropped much lower than their current price (Price 2) during the last four months. As a result, a potential investor could have increased the yield of this bearish portfolio if he had closed his bearish positions in a timely manner.

More importantly, none of the two hypothetical portfolios above has lost money but they have preserved the initial capital although the indexes have fluctuated enough during the last four months.

The Updates

I will separate now the fundamental update from the latest corporate news in order to provide a more understandable and complete picture for all the aforementioned companies.

1) Fundamental Update: Let's check out the table below with the first five bearish picks:

Company

P/E

P/BV

EV

-----

EBITDA

(annualized)

EV/CF

LT

DEBT

-----

CF

Total

DEBT

-----

EQ

Annual

Yield

ONEOK

26

4.17

11.28

8.39

3.75

6.24

3.4%

ONEOK

Partners

20

2.54

15.25

21.95

6.63

1.43

5.7%

Regency

Energy

Partners

-

1.69

15.95

30.24

8.73

0.8

6.7%

NuStar

Energy

60

1.42

16

10.17

4.23

1.22

9.6%

Targa

Resources

Partners

73

3.11

14.78

11.36

3.57

1.89

5.2%

EV: Enterprise Value

CF: Cash Flow From Operations (annualized)

EQ: Stockholder Equity

2) Latest Corporate Developments: Let's check out now the latest major news for each of the five aforementioned companies excluding the news which have already been presented in my previous articles:

A) In June, ONEOK announced that it will discontinue operating its energy services segment through an accelerated wind down process, releasing non-affiliated, third-party natural gas transportation and storage contracts to interested parties. As a result, ONEOK expects to record a non-cash, after-tax write down of approximately $75 million in Q2 2013. The company also expects to record additional non-cash, after-tax write-downs of up to $25 million between July 2013 and April 2014.

ONEOK's updated 2013 net income guidance now reflects the expected one-time charges and operating losses in the energy services segment. The updated 2013 net income guidance is expected to be in the range of $235 million to $285 million, compared with its previously announced net income guidance range of $350 million to $400 million.

B) In May, Lone Star NGL LLC and Sunoco Logistics Partners announced that long-term, fee-based agreements were executed with Shell Trading US Company to move forward with a liquefied petroleum gas (NYSE:LPG) export/import project. Shell Trading U.S. Company has committed to the project, known as Mariner South, as an anchor customer. Lone Star NGL LLC is a joint venture between Energy Transfer Partners (NYSE:ETP) and Regency Energy Partners which holds a 30% interest in Lone Star NGL LLC.

My Opinion

Nothing has improved substantially on the five aforementioned companies from a fundamental perspective. All remain heavily leveraged, with high debt and cash flow ratios. Their premium valuations are not justified by their fundamentals. This is why, their valuations can implode any time. Their alluring dividend yield is a trap and is not enough to make me bullish on them.

All these companies also suffer from very low operating margins. With such low operating margins, they can turn into losses easily if something goes wrong. The impact of the low operating margin is obvious primarily on Regency's and NuStar's bottom lines. Both companies are "Show Me" cases that have not managed to return back to consistent profitability yet.

Due to their high debt, all these five companies will most likely dilute heavily their equity base through the issuance of stock. The potential buyers need to bear this in mind too.

In short, I believe that these five companies are not worth more than they are currently. if I had them in my portfolio, I would sell them and wait for truly undervalued opportunities to show up.

Conclusion

There is one more part where I analyze the five remaining companies of the bearish portfolio above, and I discuss whether I remain bearish on them. So folks stay tuned!

Disclaimer: Data, facts and premises were determined through review of public documents, SEC filings, news releases, and transcripts. The conclusions are my own. Readers may come to different conclusions using the same information. This analysis is not intended to offer investment advice to buy or sell specific stocks.

Source: Midstream Update: Buy, Sell Or Hold For These 10 Midstream Players (Part 2)?