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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 my calls. Moreover, I noted that 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 also supported by good fundamentals.

In the first part of this series, I discussed my bullish calls. My article is here. In the second part, I discussed five of my bearish calls. The article is here. This is the last part where I discuss the remaining five bearish calls.

The Yields

I am not a momentum trader but I am a fundamentalist investor instead. I never chase prices or force any investment. I always wait for the right moment dictated by either price or market condition to pounce. This is my strategy for years now that helps me beat 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 latest bullish bets, 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.

My latest bearish bets include 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 also 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 sounds strict for 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 these 4 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

(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:

Company

P/E

P/BV

EV

-----

EBITDA

(annualized)

EV/CF

LT

DEBT

-----

CF

Total

DEBT

-----

EQ

Annual

Yield

MarkWest

Energy

Partners

-

3

19.45

32.26

8.96

1.59

5%

Targa

Resources

68

1.61

9.53

7.63

3.62

1.86

2.9%

Energy

Transfer

Equity

53

8.92

10.73

30.75

17.47

23.6

4%

Plains All

American

Pipeline

11

2.74

8.74

6.67

1.79

1.71

4.2%

Williams

Companies

33

4.82

12

16.67

5.36

4.18

4.2%

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 aforementioned companies excluding the news which have already been presented in my previous articles:

A) In May, MarkWest Energy Partners acquired certain midstream assets in the Anadarko Basin from Chesapeake Energy (NYSE:CHK) for $245 million in cash. These assets are synergistic with MarkWest's existing operations in the Granite Wash, which include gas gathering systems totaling 340 MMcf/d of throughput capacity and the 235 MMcf/d Arapaho processing complex in Custer County, Oklahoma.

In May, MarkWest Utica EMG, a joint venture between MarkWest Energy Partners and The Energy and Minerals Group, announced the expansion of its assets in the Utica shale. MarkWest Utica EMG will construct a third 200 MMcf/d cryogenic gas processing facility at its Seneca processing complex in Noble County, Ohio. Once this project is completed, the Seneca complex will include three processing plants totaling 600 MMcf/d. The first two plants are scheduled to begin operations during Q4 2013 and the third plant will be operational in Q2 2014. MarkWest also expects to install one additional plant at the Sherwood complex by mid-2014, bringing total processing capacity to 800 MMcf/d.

In June, MarkWest Energy Partners announced that Summit Midstream Partners (NYSE:SMLP) will acquire certain gas gathering assets from MarkWest in Doddridge County, West Virginia for $210 million in cash. The assets included in this transaction consist of over 40 miles of newly constructed high-pressure gas gathering pipelines, certain rights-of-way associated with the pipeline, and two compressor stations totaling over 21,000 horsepower of combined compression.

B) In May, Plains All American Pipeline announced that it is constructing a 95-mile extension of its existing Oklahoma crude oil pipeline system to service increasing production from the Granite Wash, Hogshooter and Cleveland Sands producing areas in western Oklahoma and the Texas panhandle. The new Western Oklahoma pipeline will provide up to 75,000 barrels per day of new takeaway capacity and is expected to be in service by the end of Q1 2014.

C) In April, Williams Partners (NYSE:WPZ) announced that it agreed to launch a new midstream joint venture with Shell (NYSE:RDS.A) to provide gas gathering and gas processing services for production located in Northwest Pennsylvania. The venture will invest in both wet-gas handling infrastructure and dry gas infrastructure serving Marcellus and Utica Shale wells in the area.

Williams Companies owns approximately 68% of Williams Partners. The new venture, Three Rivers Midstream, has signed a long-term fee-based dedicated gathering and processing agreement for Shell's production in the area, including approximately 275,000 dedicated acres. Three Rivers plans to construct a 200 MMcf/d cryogenic gas processing plant which is expected to be placed into service by Q2 2015.

In June, Williams' board of directors voted to approve the company's Bluegrass Pipeline project. This natural-gas-liquids pipeline has a targeted in-service date of late 2015 and will connect supply from the Marcellus and Utica shale-gas areas in the U.S. Northeast to growing petrochemical and export markets in the U.S. Gulf Coast. The pipeline also will connect NGL supply with the developing petrochemical market in the U.S. Northeast.

My Opinion

Nothing has improved substantially on Energy Transfer Equity, MarkWest and Williams from a fundamental perspective. Energy Transfer Equity has scary both debt and cash flow ratios, followed by MarkWest and Williams.

On top of that, Energy Transfer Equity has also a very low operating margin. To me, these three companies carry premium valuations which are not justified by their fundamentals and I do not find anything attractive enough to make me change my bearish call on them.

Fundamentally, Targa Resources is in a much better position than the three aforementioned companies because it does not suffer from staggering debt and cash flows ratios. I consider Targa Resources to be fairly valued with limited or zero upside from the current levels.

I am also neutral on Plains All American whose balance sheet has improved a lot since late 2012. The company's cash flow and EBITDA rose significantly in Q1 2013 compared to Q4 2012, and it remains to be seen whether this is a blip or not. On the negative side, Plains All American continues to have a very low operating margin that remains well below 10% for several quarters now.

Conclusion

Some say that the tax code might change so that the MLP structure is no longer exempt from corporate-level taxes. Canada enacted similar legislation in 2006 in relation to income trusts, which were structured like MLPs. The new Canadian legislation significantly decreased the valuation of the affected companies. If the U.S. government enacted similar changes, the move would most likely affect domestic MLP stocks negatively.

Some others say that the probability of such a move is likely small due to the small revenue gain to the U.S. government compared to the massive size of the national deficit.

No matter what happens finally on the tax front, I consider that the majority of the stocks in the midstream space are fully valued currently. Unless a significant correction happens, I am not going to put them on my buying radar.

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 3)?