2-Year Performance Comparison Of Selected MLPs

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 |  Includes: BPL, BWP, EPB, EPD, ETP, KMP, MMP, NGLS, PAA, RGP, SPH, WPZ
by: Ron Hiram

As an investment class, master limited partnerships ("MLPs") have underperformed the S&P 500 for the past 1-year and 2-year periods. I derived the chart below using November 30, 2011 as the starting level for both the Alerian MLP Index, a composite of the 50 most prominent energy MLPs, calculated on a total return basis ("AMZX"), and for the S&P 500 Total Return Index "(S&P500 TR"). I then set both starting points to 1.00 and all subsequent data is presented as a multiple of the November 30, 2011 levels.

Click to enlarge Chart 1: S&P 500 and the Alerian MLP Index (Nov 30 2011 = 100)

From November 30, 2011 to November 30, 2013, the S&P 500 TR and the AMZX registered gains of ~51% and ~39%, respectively. One year returns (from November 2012 to November 2013) were ~31% and 22%, respectively.

There are twelve MLPs that I follow fairly closely. Their performance has diverged widely. Table 1 shows total returns for a one-year holding period (December 3, 2012 to December 5, 2013):

12-months ending Dec 5, 2013

Price change

Distributions

% Return

Boardwalk Pipeline Partners (NYSE:BWP)

(1.50)

2.13

2%

Buckeye Partners (NYSE:BPL)

17.00

4.23

43%

El Paso Pipeline Partners (NYSE:EPB)

(2.61)

2.51

0%

Energy Transfer Partners (NYSE:ETP)

10.29

3.59

32%

Enterprise Products Partners (NYSE:EPD)

10.60

2.70

26%

Kinder Morgan Energy Partners (NYSE:KMP)

(1.06)

5.26

5%

Magellan Midstream Partners (NYSE:MMP)

15.92

2.10

41%

Plains All American Pipeline (NYSE:PAA)

2.86

2.33

11%

Regency Energy Partners (NYSE:RGP)

2.44

1.86

20%

Suburban Propane Partners (NYSE:SPH)

5.77

3.50

24%

Targa Resources Partners (NYSE:NGLS)

13.43

2.83

44%

Williams Partners (NYSE:WPZ)

(0.85)

3.42

5%

Click to enlarge

Table 1: $ per unit, except percent returns

Table 2 shows total returns for a two-year holding period (December 3, 2011 to December 5, 2013):

Click to enlarge Table 2: $ per unit, except percent returns

The following table divides the MLPs reviewed into performance groups based on my arbitrary 10% per annum return cut-off point. In the Year-1 column are the less consistent achievers for the 1-year holding period ending Dec. 2012. In the Year-2 column are the less consistent achievers for the 1-year holding period ending Dec. 2013. In the last column are those that performed consistently (whether well or poorly) in both holding periods:

Click to enlarge

Table 3: Rough performance classification

There is, of course, no formula for selecting MLPs. Tables 1-3 constitute rear view mirror parameters that can help put performance in perspective, but must be accompanied by assessment of many additional factors. Nevertheless, they do provide a starting point and, in the case of Table 3, a crude classification system showing, over a two-year period, which MLPs were:

  1. Consistently good performers: EPD, MMP, PAA
  2. Consistently poor performers: BWP, KMP, WPZ
  3. Showing improved performance, in some cases after expensive acquisitions: BPL, ETP, NGLS, RGP, SPH
  4. Showing deteriorating performance and/or outlook: EPB

Distributable cash flow ("DCF") is a quantitative standard viewed by investors, analysts and the general partners of many master limited partnerships ("MLPs") as an indicator of the MLP's ability to generate cash flow at a level that can sustain or support an increase in quarterly distribution rates. Since DCF is not a Generally Accepted Accounting Principles ("GAAP") measure, its definition is not standardized. In fact, as shown in a prior article, each MLP may define DCF differently.

I use the term sustainable DCF to distinguish my definition from those used by the MLPs. Since "sustainability" is not a clearly defined term, my definition is a subjective one. In that respect, it is not different. But by minimizing deviations from the GAAP term "net cash from operating activities", I create a measurement tool that I believe provides better consistency in evaluating an individual MLP's performance. See a prior article for a review of the variety of factors causing reported DCF to differ from sustainable DCF as I calculate it. I then use sustainable DCF as a common yardstick to improve my ability to compare MLPs. Of course, it is by no means a sole yardstick.

A comparison sustainable DCF coverage of total distributions made (including, where applicable, the general partner) for the last two trailing 12-month ("TTM) periods is provided in Table 4 below:

Click to enlarge

Table 4

The highlighted cells show MLPs that have both the strongest coverage ratios and the most improved year-to-year coverage ratios.

Those are the same 3 MLPs that were identified in Table 3 as consistently good performers.

The deltas between reported and sustainable DCF coverage can be quite significant. The underlying reasons are described in my analysis of the individual MLPs. Some relate to investments in working capital, others to proceeds of asset sales, foreign currency adjustments and losses from derivative activities.

To reemphasize, the selection process for MLP investments is not formula driven. The highest total return performers for the past two years were not necessarily those providing the highest yields. Nor were they necessarily those showing fastest growth in distributions or best coverage ratios. For example, WPZ was a strong performer in 2011 and had one of the highest coverage ratios, but reliance on acquisitions (vs. internally generated growth) and issuances of large amounts of units to finance them drove down the unit price. Likewise, EBB showed strong coverage ratios prior to the acquisition of its general partner by a Kinder Morgan entity. Tables such as those herein can help put performance in perspective, but must be accompanied by assessment of many additional factors.

Disclosure: I am long EPD, EPB, MMP, PAA, SPH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.