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, Wise Analysis (437 clicks)
Research analyst, dividend investing, oil & gas, mid-cap
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Summary

  • As an asset class, MLPs have been highly correlated with, but underperformed, the S&P 500 for the past 2 years.
  • The underperformance has been pronounced in the latest 12 months.
  • EPD, MMP and NGLS have exhibited consistently superior unit holder returns for the past two years.
  • BWP, SPH and WPZ have exhibited consistently poor unit holder returns for the past two years.
  • EPD, MMP and PAA have exhibited strong coverage of sustainable DCF coverage over total distributions.

As an investment class, master limited partnerships ("MLPs") have been highly correlated with the S&P 500 for the past 2 years. I derived Chart 1 using March 31, 2012 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 March 31, 2012 levels.

(click to enlarge)Chart 1: S&P 500 and the Alerian MLP Index (Mar 31 2012 = 100)

In the latest two-year period (March 31, 2012 to March 31, 2014), the S&P500 TR and the AMZX registered gains of 38.9% and 33.6%, respectively. But, as seen in Chart 1, the AMZX has significantly underperformed the S&P500 TR since March 2013. Returns from April 1, 2013 to March 31, 2014 were 21.9% for the S&P 500TR and 8.5% for the AMZX.

There are twelve MLPs that I follow fairly closely. Their performance has diverged widely. Table 1 shows total returns for the one-year holding period from April 1, 2013 to March 31, 2014:

Table 1: $ per unit, except percent returns

Table 2 shows total returns for the one-year holding period from April 1, 2012 to March 31, 2013:

Table 2: $ per unit, except percent returns

Table 3 shows total returns for a two-year holding period (April 1, 2012 to March 31, 2014): Table 3: $ 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 Column 1 are the less consistent achievers for the 1-year holding period ending March 31, 2013. In Column 2 are the less consistent achievers for the 1-year holding period ending March 31, 2014. In Column 3 are those that performed consistently (whether well or poorly) in both holding periods:

(click to enlarge)Table 4: 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 above 10% per annum returns: EPD, MMP, NGLS
  2. Consistently positive, but below 10% per annum, returns: SPH WPZ
  3. Generating consistently negative returns: BWP
  4. Showing improved performance, in some cases after expensive acquisitions: BPL, ETP, RGP
  5. Showing somewhat poorer performance: PAA
  6. Showing significantly poorer performance: EPB, KMP

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, the general partner's incentive distribution rights ("IDRs") for the last three years is provided in Table 5 below:

2013

2012

2011

Buckeye Partners (NYSE:BPL)

0.72

1.03

0.73

Boardwalk Pipeline Partners (NYSE:BWP)

0.87

1.02

0.86

El Paso Pipeline Partners (NYSE:EPB)

1.05

1.17

1.46

Enterprise Products Partners (NYSE:EPD)

1.48

1.15

1.34

Energy Transfer Partners (NYSE:ETP)

1.03

0.64

0.86

Kinder Morgan Energy Partners (NYSE:KMP)

1.08

1.16

1.16

Magellan Midstream Partners (NYSE:MMP)

1.43

1.33

1.40

Targa Resources Partners (NYSE:NGLS)

0.77

1.28

1.23

Plains All American Pipeline (NYSE:PAA)

1.44

1.07

1.54

Regency Energy Partners (NYSE:RGP)

0.98

0.81

0.99

Suburban Propane Partners (NYSE:SPH)

0.71

0.72

0.85

Williams Partners (NYSE:WPZ)

0.85

0.94

1.40

Buckeye Partners

0.72

1.03

0.73

Table 5

Note that BPL, EPD and MMP do not make incentive distribution right ("IDR") payments to their respective general partners. For these 3 MLPs the coverage ratios at the limited partner level and the partnership level are the same. Calculating coverage ratios at the limited partner level for the other MLPs requires several adjustments. I will attempt to show those in a future article.

The highlighted cells show that EPD and MMP are in a class onto themselves as far as sustainable distribution coverage. They also appear in Table 4 as consistently good performers. PAA's coverage ratios are also very strong.

The deltas between reported and sustainable DCF coverage can be quite significant. The underlying reasons are described in the 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, EPB 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.

Source: 2-Year Performance Comparison Of Selected MLPs