MLPs After Their Worst Year

 |  Includes: AMJ, EEQ, KMP, KMR, SPP
by: Avi Morris

One year ago I began writing for Seeking Alpha; my first article was an introduction to MLPS. They had come through a very difficult period, as was the case for the stock market. The Alerian MLP Index declined from its peak of 342 in July 2007. First it slipped into the low 300s and then fell to the high 200s, a little better performance than the Dow.

Following my article was "Terrible September", the worst month for the stock market, which included the Lehman collapse. Markets (including MLPs) fell off a cliff. In just one month, the index fell from 270 to 226, a 4 year low at that point. The stock market kept falling. The index plunged below 160 at its lows.

However, it remained above its starting point of 100 at the end of 1995. Markets roared back from their lows in March with MLPs leading the charge. The MLP index rose to 238, up 35% in 2009 and distributions add another 8%.

Most MLPs have gotten through the credit crisis in better shape than their units traded on stock exchanges. MLPs are energy companies which typically build pipelines and terminals for moving and holding petroleum and natural gas. They need a constant supply of capital for these projects and that has been available even in the last year.

A few smaller MLPs were adversely affected by the economic downturn and have had to reduce or eliminate their distribution to focus on paying down debt. Constellation Energy Partners (CEP) is one I follow. Their unit price is a little above the $2.25 distribution they paid 2 years ago. They have a short track record of getting gas from Alabama's Black Warier Basin. Management has been changed and the reduced distribution was eliminated in Q3 to concentrate on paying down debt. For the venturesome who think chaos brings opportunity, Constellation Energy may be of interest. If it gets straightened out and they restore the distribution there will be an excellent return.

However distribution reductions at MLPs have been few. Most have been able to finance capital expansion. Kinder Morgan (NYSE:KMP), the largest MLP, early in 2009, declared their intention to pay a record distribution of $4.20 per unit in 2009 and are delivering. Meanwhile, they haven continued a multi billion dollar expansion program for their pipelines and terminals. Kinder Morgan has increased debt and are on track for selling $1 billion of equity to help finance expansion.

The future for MLPs has not changed from last year, the nation needs much more capital investment by MLPS and this is a national priority. In the worst financial crisis since the Great Depression, their ability to obtain additional financing for projects speaks highly about their growth potential.

A new investment product is available for those who want to invest in MLPs using a portfolio approach. A closed end investment fund with the ticker symbol AMJ tracks the Alerian MLP Index equivalent to 10% of the index. AMJ shares allow an investor to participate in industry growth and share in the related investment income. It has the added advantage of being a corporation paying dividends, thus tax hassle associated with distributions is avoided.

Whether buying units for direct investment in an MLP or purchasing shares in equivalents, such as Kinder Morgan (NYSE:KMR) or Enbridge Energy (NYSE:EEQ), MLP investment should be considered for growth and high income with tax advantages. Their financial strength during the current financial crisis is an impressive reminder of where they are going.

Disclosure: no positions