We have recently sold a portion of our portfolio position in Chesapeake Granite Wash Trust (CHKR), after hearing the Conference Call express some doubt that subordination threshold distribution levels might not be met in the next quarter or so. That will afford us the opportunity to re-invest the proceeds and hopefully make up for our loss.
I have recently spent a lot of time looking at several master limited partnerships [MLPs]. We are presently overweight in MLPs; however this is primarily reflected in the upstream sector. Going forward, I am looking for those having the potential for total return (distribution + appreciation), a decent yield (five percent or more), a distribution/distributable cash flow [D/DCF] under 1.0, and where possible a positive compound annual growth rate [CAGR]. The field quickly narrowed down to a few midstream players, and two general partners.
In the midstream class, we present information pertaining to Atlas Pipelines, Rose Rock Midstream, and El Paso Pipeline Partners.
Atlas Pipeline Partners (APL)
APL operates in the gathering and processing portion of the midstream MLPs, having a presence in the Permian, Anadarko, and Arkoma basins, and also in the Appalachian basin in the northeast. The most recent quarterly distribution was raised to $.62 from the prior quarter level of $.59.
Its distribution coverage ratio is forecast to be 1.13X in 2013, 1.07X in 2014, 1.12X in 2015 and 1.09X in 2016. The annual distribution per unit is forecast at $2.53 in 2013, $2.88 in 2014, $3.15 in 2015, and $3.39 in 2016.
CAGR estimates for the next five years are 9.5 percent. Estimated total return is just over 12 percent per annum.
The sole downside is that APL is currently trading at less than two dollars below its highs.
Rose Rock Midstream (RRMS)
RRMS is engaged in refined products, oil and storage, and it has a presence in North Dakota, Kansas, Colorado, Montana, Oklahoma and Texas. Its most recent quarterly distribution was $.44, an increase of $.01 above the previous quarter.
The distribution coverage ratios are estimated to be 1.29X, 1.18X, 1.10X and 1.08X respectively, for the years 2013, 2014, 2015, and 2016. Forecast annual distributions are: $1.76, $2.00, $2.24, and $2.53 for 2013, 2014, 2015 and 2016.
The estimated CAGR for the coming five year period is 13 percent. The annual total returns are forecast to be on the order of 12 percent.
RRMS currently trades at $32.19, around ten dollars under its highs.
El Paso Pipeline Partners (EPB)
EPB was not on my view screen until a few days back. It is a component of the Kinder Morgan energy complex, and with the recent news that a hedge fund (Hedgeye - hopefully soon to be re-named Blackeye) is shorting their stocks, I became intrigued. This is the same group, headed by a recent college graduate, with little, or no experience that successfully took down LINE and LNCO stocks. Personally, I believe he is messing with the wrong guy in Richard Kinder, and Hedgeye could well get their clock's cleaned on this one.
EPB is an interstate transporter of natural gas. Its operations span the Rockies, Midwest and Southeast U.S. The most recent quarterly distribution was $.63, and the distribution has been increased by about a penny a quarter for the past few quarters.
The distribution coverage ratios for the period 2013 - 2016 are: 1.02X, 1.04X, 1.02X and 1.02X. Anticipated annual distributions are: $2.54 (2013), $2.70 (2014), $2.86 (2015), and $3.02 (2016).
CAGR estimates for the coming five years are just above seven percent, and average annual total return is projected at a lower six percent.
EPB is trading at $40.61, less than five dollars below its highs.
What makes EPB of interest is the anticipation of it potentially dropping when the negativity from Hedgeye hits on September 10.
Atlas Energy (ATLS)
ATLS is the general partner of APL. I believe that its distribution possibly has significant growth in the coming three to four years. Last quarter, the distribution was increased from $.31 to $.44. Even though its yield is relatively low at present levels of 3.5 percent, the growth rate is 100 percent.
Total return projections for ATLS are in the range of 25 percent annually. Forecast distributions are: $1.90 for 2013, $2.70 for 2014, $3.48 for 2015 and $4.30 for 2016. Coverage ratios for 2013 are 1.00X, for 2014 1.04X, for 2015 1.09X, and fr 2016 1.07X.
The forecast five year CAGR is 35.3 percent. At $50.95, ATLS trades fairly close to its highs of $55.70.
Kinder Morgan Inc. (KMI)
My attention has been drawn to KMI for the same reason as it was to EPB. It is the general partner of the Kinder Morgan group.
The most recent KMI distribution was $.40, an increase of $.02 above the distribution of the previous quarter. The current yield is 4.2 percent. Forecast distributions are: $1.58 for 2013, $1.74 for 2014, $1.92 for 2015, and $2.12 for 2016. The coverage ratio for these four years will be in the range of 1.02X - 1.03X.
The projected annual return rate for KMI is 12 percent, and the coming five year CAGR is 10.6 percent. At a current price of $35.54, KMI trades about six dollars off of its highs.
As is the case with EPB I await reaction to the coming Hedgeye report on September 10.
I basically like all five of these MLPs, but APL, RRMS and ATLS in particular. With September being an "iffy" month for the markets I intend to follow each closely. Should either EPB or KMI break down significantly I might take a small position - most likely in EPB.
Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the stocks mentioned.