MLPs Had Another Excellent Quarter

by: Avi Morris

MLPs completed another superior quarter. The Alerian MLP Index closed Q1 at 303, up 6.3% or pretty much double the lows of Nov 2008. Adding distributions brings the gain to about 8%, implying an annual rate of roughly 32%. The separate Alerian MLP Index including reinvested income closed Q1 at 817, a new RECORD level, illustrating the value of reinvested dividends from growth companies!

In about 10 days, quarterly reports for Q1 and Q2 distribution announcements will be released. There have not been a lot of new developments for MLPs in 2010. Their lifeblood, financing for capital projects, was and is available. Interest rates on debt are moderate because of the high regards in which lenders hold MLPs and the very low interest rate environment. Investors are willing to purchase units sold in offerings. BreitBurn Energy Partners (BBEP) settled a lawsuit which will permit it to resume paying a distribution in Q2.

New announcements for MLPs are expected to be favorable. To me, earnings announcements are less than clear. Earnings don't necessarily increase quarter over quarter or over the prior year. But distributions are paid from distributable cash flow per unit which generally is not defined. Based on track records, more quarter over quarter distribution increases can be expected.

Bulls need to keep a sense of reality in mind. The spectacular rise for the index (off its lows in 2008) can not last. The advance already slowed in Q1. These are yield securities and the yield is below 7% or only 300+ basis points above the yield on the 10-year Treasury bond. The specter of higher interest rates is worrisome. Another major sector with extraordinary gains in the last year is junk bond funds. They also have had their greatest rally in history, but that has reduced yields to low historical levels.

After the plunge by the index off its high of 342 in July 2008, the index traded near the 300 level for about a year. Then it plummeted followed by a rebound last year back to that important 300 level. The index had a difficult time going below that level and may take a long time (measured in months) before it breaks above this region. The favorable long term outlook for MLPs remains in place, but investors should be prepared to accept modest gains from appreciation in 2010.

The latest listing for the top 5 MLPs in the Alerian MLP Index is presented below along with the index weights in Q1 2010:

Enterprise Products Partners..........(NYSE:EPD)__15.5%
Kinder Mortgage Energy Partners...(NYSE:KMP)__12.0%
Plains All American Pipeline.............(NYSE:PAA)___6.0%
Energy Transfer Partners................(NYSE:ETP)___5.8%
Magellan Midstream Partners..........(NYSE:MMP)___4.8%


Footnote: 6th on the list is Kinder Morgan Management (NYSE:KMR), the stock equivalent of the limited partnership (KMP). The 2 classes combined represented 16.3% of the index, making Kinder Morgan the largest MLP by market cap. These 5 MLPs account for almost half of the index.

Disclosure: No positions