"There are three constants in life... change, choice and principles." - Stephen Covey
- Barron's MLP (Master Limited Partnerships) forum is a good venue to find attractive high yield plays in the space.
- The domestic energy boom has brought about a huge increase in energy infrastructure investment and MLP opportunities.
- MLPs have outperformed the overall market for the majority of the last decade and a half.
- Below are a couple of MLPs offering solid yields, strong distribution growth and attractive long term valuations.
Barron's, the widely read weekly industry magazine, came out with one of my favorites forums this week. Every year the magazine gathers energy analysts together in a roundtable and discusses the Master Limited Partnership [MLP] space and offers up some attractive values.
The huge domestic energy boom over the past six years has seen a corresponding explosion in the energy infrastructure (pipelines, storage facilities, etc..) needed to transport our increasing energy bounty - all without needing any taxpayer funding.
Thanks to a significant rally in equities, MLPs have underperformed the market in both 2012 and 2013. Prior to that, the industry had outperformed the S&P for twelve straight years. Over the past decade, energy MLPs have provided investors an average 16% annual gain including distributions and capital appreciation.
The space has outperformed the increasingly volatile overall market in the first six weeks of the year, thanks partly to declining interest rates. Here are a couple of high picks offered up in this week's Barron's that I also find attractive at these levels.
Energy Transfer Equity, L.P. (ETE) owns and operates a diversified portfolio of energy assets in the natural gas, natural gas liquids, and propane sectors in the United States. Energy Transfer was the only unanimous selection of the four analysts of the Barron's forum this week.
This is one of the largest plays in the space with an enterprise value north of $45B. It owns stakes in other MLPs. Energy Transfer has a huge network of thousands of miles of natural gas pipelines, gas processing facilities as well as natural gas liquids transport facilities and other assets.
The company recently announced a two for one stock split and added $1B to its stock repurchase program. Energy Transfer will also contribute $400mm towards purchasing units of Regency Energy Partners (RGP) which will help finance that entity's $1.3B acquisition of Eagle Rock's (EROC) midstream business that should work for all parties involved.
Wells Fargo came out in mid-January stating the shares have ~20% to 25% upside and that a proposed natural gas liquid MLP spinoff is currently undervalued by the market. The shares only yield 3.2%, but the partnership has ~tripled its distribution payouts since 2006. Given the size and diversity of Energy Transfer's assets, it is a good proxy for the energy infrastructure space.
Plains All American Pipeline (PAA) is a limited partnership engaged in interstate and intrastate crude oil transportation, terminalling and storage, as well as crude oil gathering and marketing. It is called out in the forum as the 'best in class' operator of transportation and storage assets. It also has been a long time holding in my own income portfolio.
The shares yield a healthy 4.6%. The entity is a consistent an incrementally payout hiker, and the distribution has more than doubled per share over the past nine years. In its last conference call, the company's management guided towards adjusted EBITDA of $2.15B in FY2014.
This forecast incorporate 15% Y/Y growth in fee based segments. Plains is targeting 10% distribution growth for 2014 with 110% coverage at guidance midpoint. Plains also has a solid balance sheet, and its long term growth will benefit from the continued production increases in the Permian and Eagle Ford shale formations.
These two selections are 'slow and steady wins the race' picks. They provide solid yields, growing distributions, good management and low betas. For income investors, both are solid 'singles' in what is shaping up to be a very different year in the market than 2013.