MLPs in Good Shape, Despite Credit Crisis

by: Avi Morris

The last 12 months have been an unusually volatile time for MLPs.

Traditionally they are low beta securities, but in September 2008 stocks fell off the cliff and MLPs joined in the massive sell-off. It looked like the end of the world; there were even requests to get Chicken Little's phone number. MLPs then had a very rough five months but came roaring back from the lows in March 2009. The Alerian MLP Index (AMZ) shot up from under 160 to just above 250. Then for two months the index traded sideways in the 240s; no advance while the rest of the markets kept going higher. Wednesday marked a new 2009 high of 252, but because the index did not break through the ceiling with conviction it's too early to tell if MLP buyers can take the index to new highs.

MLPs pipelines kept moving oil and gas in 2009. They have been able to secure large sums of outside financing for capital expansion (their main business), though a few MLPs have had to eliminate distributions to get their finances squared away. BreitBurn Energy Partners (BBEP), for example, just reaffirmed its borrowing base of $732 million (Translation: it reduced borrowings by $150 million and gave the impression that distributions may return fairly soon). The units gained and have more than doubled from the depressed lows earlier in 2009. Constellation Energy Partners (CEP) also eliminated its distribution in 2009 and will probably make an announcement soon about improving their finances. MLPs announce results and distributions for Q4 later in October.

The two largest MLPs, Kinder Morgan (NYSE:KMP) and Enterprise Products Partners (NYSE:EPD), have continued to attract billions for their capital expansion programs. Kinder Morgan said it has already raised over 75% of the $1 billion in equity funds it expected to raise by selling units in 2009. Increased equity allowed it to increase borrowing with attractive rates at a time when loans have been difficult to obtain. Enterprise Products Partners just borrowed another $1-plus billion after selling more than 8 million units. It is also completing a merger with TEPPCO Partners (TPP) which will make it the largest MLP.

Overall, MLPs have gotten through the credit crisis in good shape. Many have maintained or increased distributions, only a few have cut or reduced theirs and it looks like they will survive. The very brave might want to buy MLPs which have eliminated distributions hoping to benefit from higher prices if distributions are restored (or partially restored).

The biggest worry is if the economy pulls back again, how will that affect MLPs? Their results are fuzzier than for other companies since distributions are paid from distributable cash flow, not EPS, and few really understand distributable cash flow.

Disclosure: No positions