On 15 September I recommended “The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains” (here.)
Two were speculative, 7 were solid citizens. All are up, but then so is the market.
All are up more than the market, but then they were bought at a good time, as verified by some of the commenters at the time who questioned my mental status for not “knowing” that all the natural gas storage tanks were full, ships were madly steaming about the Atlantic and Pacific filled with LNG (liquefied natural gas) and shale gas was going to create a glut of such epic proportions that the next price for natural gas was likely to be less than $1 per million BTU (MMBtu.)
Yes, I analyzed all those factors. But I also observed that air conditioning season was over just about everywhere but the Florida Keys and Hawaii – it was mid-September, after all – but that winter had not yet arrived. Of course there was a glut for a month or two.
Since both The Farmer’s Almanac and my local squirrels, birds, bears, et al were scurrying about in a panic to collect food, I figured those were two indications that the nation might just use a little natural gas this winter. Hardly a complicated or particularly insightful observation, at least in retrospect; it just required some experience with previous cycles and a dollop of common sense.
I have since advised SA readers that I am lightening up on some of our natural gas pipeline positions, my logic being that they have not found a cure for cancer nor developed an energy-free perpetual motion machine. They move fuel from point A to point B, a steady, dependable business, but hardly worthy of PEs in the 20-40 range.
We now have a particular conundrum with Williams Partners LP (WPZ) which was selling at 21.61 in September and closed at 37.66 yesterday (20 Jan 2010), a return of 74% in 4 months and 5 days.
The reason it is a conundrum is that there is no doubt in my mind the recently-announced decision by Williams Companies (WMB) to restructure assets by contributing its gas pipeline and domestic midstream businesses plus its limited- and general-partner interests in Williams Pipeline Partners L.P. (WMZ) into Williams Partners – WPZ -- will transform WPZ into the third-biggest pipeline firm in the country, carrying a critical natural and national resource.
There’s also no question in my mind that it’s a sweetheart of a deal for WPZ and that it will likely allow them to raise their dividends at an accelerated rate and amplitude. And I imagine it will allow the WPZ arm to raise capital more cheaply and easily since it is a steady, dependable, easy-to-understand business with no E&P (exploration and production) risk.
But you know what? They still haven’t found a cure for cancer or developed that energy-free perpetual motion machine. So I am taking the gift of a 74% move on a company I expected to enjoy what was, at our cost basis, a near-11% yield with maybe a 20-40% capital gain if all the stars lined up. Personally, I don’t care whether our gains come from dividends or capital gains; we are equal-opportunity accepters of market largesse.
The only lesson I’d like to pass along is that if you buy it right, which usually means, as in this case, when no one else wants it, a lot more good things can happen than if you buy it when everyone else has already loaded the lifeboat to the same side.
Author's Disclosure: We and/or clients for whom it is appropriate are selling all of our WPZ on 21 Jan 2010. We’ll be back, however – there will come a time in the spring or fall when all the articles you read will talk about a glut of natural gas again. We’ll be the poor fools who just don’t “get it” who are then buying from the anxious sellers.
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