K-Sea Transportation: Insiders Buying a 15% Yield; Catalysts Abound

by: Dan Plettner

Some time ago, I recognized that the yield provided by Master Limited Partnerships (“MLPs”) may increasingly become tasteful within an environment of limited income alternatives. With an interest of making an MLP portfolio allocation, I started by looking at MLP focused Closed-End Funds: KYN, KYE, TYG, TYY, FMO, MTP-OLD, FEN, TYN, SRV (in order by market cap). With the entire Closed-End Fund group trading at premiums, I focused my effort on screening the professional managers’ own MLP selections. Because of the group’s run-up, I was particularly interested to look at recent insider purchases in conjunction with favorable MLP sub-category yields.

I certainly did not expect my screen to position me as a buyer of K-Sea Transportation Partners shares. Given my own vague recollection of its a) dividend cut, b) disclosure of debt covenant concerns, and c) choice not to provide analysts with guidance – I was very surprised to see that two K-Sea Directors had shortly thereafter made meaningful personal investments in KSP shares at prices from 11.48 to 11.80.

My next step was to listen to the October 28th earnings conference call where KSP revealed all the bad news. It was this call that resulted in a prompt severing of half of KSP’s market value, allowing shares to now trade with a yield north of 15% even after the sharp dividend reduction. Two things really surprised me in listening to the call and its Q&A session. First, the debt covenant issue was based on a trailing 12 month period -- including the same particularly unique period which shows up in every investor’s 2009 graph of portfolio performance. Second, the analysts appeared in professional need of guidance which they did not receive. Such an unsatisfied need helped me to appreciate how the share price may have been overly harmed by panic-induced selling.

After being comforted by the practice of a return phone call from Chief Financial Officer Terrence Gill, I choose to personally speculate that the market had over-reacted to the debt-covenant issue. The issue was promptly announced prior to having seen through efforts of resolution. I believe that any resolution to the issue would be received positively by the market.

A frustrating year for K-Sea Transportation Partners shareholders concluded with a positive Thursday. After researching the stakes and actions of any institutional holders who could have potentially been inclined to mark it, I have been unable to identify a single plausible participant in the strategy. Kayne Anderson is the only known institutional holder with any meaningful motivation, and they had far better candidates for marking in EPD, GLP, MMP, MWE, PAA, RGNC, and WPZ. I observed no reason to believe Kayne Anderson was marking anything.

I consider KSP to be speculative, particularly for anyone who is taking anything other than a basket approach. While speculating on the security myself in the interest of generating a dialogue and myself learning more, I am certainly not recommending any investment to others. Others with insights on KSP will be inclined to comment. I currently believe that the relevance of single hull vessels in its business mix may be overblown, and that the relevance of the US Flag Jones Act is underappreciated. Having purchased Thursday at 11 and change, I myself hope to benefit with other readers from additional perspectives that help to inform whether to continue buying, or when to take profits.

Disclosure: long KSP