- Changes in DCF projections explain outside the mean unit price changes.
- Don't buy an uncovered distribution - be even more reluctant when the forward projections look bad.
- Average MLPs are underperforming the market - so have a high-growth MLP portfolio.
- Growth projection can dissipate - so be diversified in high-growth options.
- You can catch a falling knife - but I still believe that is still a high-risk strategy.
With changes in unit prices that range from a loss of 45% to a gain of 24%, the changes in midstream MLPs (Master Limited Partnerships) prices can appear all too random. But there are patterns in the numbers. Smart investors are those who can see those patterns - and learn from those lessons. This article shows the data for midstream MLPs from Q1-14 - and covers some of the lessons one can hear when listening to the numbers. If you have read my prior articles on MLPs here at Seeking Alpha, then the lessons will already be familiar to you. On the other hand, I like it when the numbers tell the same story quarter after quarter and year after year. It is easier to win at this investing task when the keys to the game are not constantly shifting. I can find comfort in the redundancy of the story that the numbers tell. Let's start with the year-to-date data:
MLP Midstream 03-31-14
Yields are based on the Q1-14 distribution. Under the "year-to-date" header, the change in the distribution is actually the change since Q1-13 - or the change over the last twelve months. The change in the target, EPS, DCF and CAGR is the percentage change in the consensus 2014 projection that has happened since the beginning of the year.
|Current||Distrib/||Q1 Dist||Dist/DCF||Dist/DCF||Year-to-Date Percent Change|
|The (price change only) Alerian MLP index [the ^AMZ - which includes other MLP sectors] is 0.39% year-to-date.|
|The Alerian MLP index ETN AMJ is 0.41%, and with dividends is 1.63%.|
|The S&P 500 index ETF SPY is 1.26%, and with dividends is 1.70%.|
|The Russell 2000 index ETF IWM is 1.89%, and with dividend is 2.15%.|
|With the 10-yr. Treasury @ 2.72% & the sector average yield [on Q1 distribs] at 5.69% - the spread is 297 bps.|
|With the JNK yielding 5.78% - spread to the Lehman U.S. High Yield Index is -9 bps.|
|With the HYG yielding 5.86% - the spread to the iBOXX High Yield Index is -17 bps.|
Changes in DCF projections explain outside the mean unit price changes
If you want an explanation for atypical unit price performance, look at the changes in the DCF projections. As I have noted before - this is the change in the current 2014 earnings projection, compared to the 2014 projection at the beginning of the year. It is not the change in the 2014 projection compared to the 2013 projection.
Intra-year DCF Estimate Increases and Year-to-Date Returns: This is one metric where the retail investor will have some difficulty capturing an advantage. But awareness of the historical DCF accuracy helps. Changes in DCF projections explain unit price changes. You are better off than the average investor if you have some partial answers to the question of why MLP ABC outperformed, while MLP XYZ underperformed. In order to have confidence in this explanation, the metric is tested year after year.
The following companies had 2014 DCF estimate increases since the beginning of 2014: ACMP, ETP, EQM, HEP, MMP, NGLS, NS, OILT, PAA, RGP, SEP, SXL, WES and WPZ. Their mean price gain for the year is 8.12%. Their mean total return for the year is 9.40% - and 12 of the 14 beat the sector median yearly price gain of 1.29%. Their average historical DCF projection accuracy rating is 2.04.
The following companies had 2014 DCF estimate decreases since the beginning of the year: AMID, APL, BKEP, BPL, BWP, DPM, EPB, EEP, EPD, GEL, MWE, OKS, TLLP and XTEX. Their mean price gain for the year is -3.03% (with BWP accounting for 339 bps of that decline). Their mean total return for the year is -1.67% - and 7 of the 14 beat the sector median yearly price gain. Their average accuracy rating is 2.83.
It is important to note that the "increasing" group was also the group with the better - or lower - accuracy rating. While the changes in DCF projections is a rear-view mirror metric that explains why unit price changes have happened, the DCF projection assessment has fairly good consistency in projecting the stocks where such future disappointments are most likely to happen. One cannot avoid having some investments with earnings projection disappointments. On the other hand, one can minimize the impact of those disappointments by being heavily weighted in stocks with higher historical earnings projection accuracy.
Four MLPs stand out for their superior unit price gains: EQT Midstream Partners, Oiltanking Partners, Sunoco Logistics Partners and Tesoro Logistics. EQM began the year with a 2.93% yield, OILT with a 2.87% yield, SXL with a 3.34% yield and TLLP with a 4.17% yield in a coverage universe where the average yield was 5.77%. It is frequently the case that a small yield will not hold back a good stock from having further unit price appreciation. All four have sky-high CAGR projections. As expected, given the correlation between CAGRs and distribution/DCF ratios, all have low distribution/DCF ratios - 69.92%, 66.92%, 57.69% and 88.62%, in a sector where the average is 92.87%. As noted above, three of the four have had 2014 DCF projection increases since the beginning of the year.
Don't buy an uncovered distribution
The one MLP that stands out in a negative way is Boardwalk. I have already covered that story in "MLP Brokerage Analysts Are Worthless" - but it is worth a quick re-telling. Here is a portion of the spreadsheet giving the MLP stats at the end of 2013:
|Current||Distrib/||Q4 Dist||Dist/DCF||Dist/DCF||Year-to-Date Percent Change|
The end-of-the-year numbers already said that BWP had an uncovered distribution - and the projection for 2014 made the degree of that lack of coverage become even worse. Then, with the conference call early this year, BWP provided guidance that shrank the already falling 2014 DCF projection. BWP already had a reputation for poor accuracy (or DCF projection disappointments) in the consensus analyst DCF projection accuracy. So, what happens when you add danger (lack of coverage) to danger (poor accuracy)? You get what happened to BWP in 2014.
Average MLPs are underperforming the market - have a high-growth MLP portfolio
Newcomers to MLPs are drawn by their higher yields. And it is logical to be more attracted - initially - to the higher-yielding options. But one should fight that temptation. MLPs come in all kind of flavors when it comes to distribution growth projections. Low-growth MLPs logically have the higher yields. And low-growth MLPs have underperformed the market since 2011. On the other hand, higher-growth - and lower-yielding - MLPs have done pretty well.
MLP ETNs & ETF 03-31-14
While divs are displayed to 4 digits right of the decimal, some of the data is stored as 5 digits.
All ETNs have been credited with one dividend payment year-to-date.
|ETN||Name||Price||Price||Div||Div||Div||Div||Div||Div||Div||Price||Pr + Div||Div|
Dividends paid to shareholders of record on:
|AMJ: 03-11-14||AMLP: 02-13-14||MLPG: 01-22-14||MLPI: 01-22-14|
|MLPN: 03-11-14||MLPW: 01-22-14||MLPL: 01-22-14|
Price Changes and Total Returns Since the Beginning of 2012, 2011 and 2010
Three Yahoo charts are saved to one image. The first chart shows how the S&P 500 (represented by the SPY ETF) has beaten the cap weighted Alerian index (represented by the AMLP ETF) since 2011. It is a graphic representation of the kind of mental picture you should have from the data in the above spreadsheet. The second chart shows the S&P or SPY as compared to three growth MLPs (MMP, PAA and WES) over the same period. The third chart shows the same four investments over the last two years. All three MLPs still beat the S&P over the last two years - but the degree of the outperformance has shrunk.
I suspect that some of you might be saying "Now wait a minute. You just said that if you are going to invest in MLPs, then plan to beat the MLP index? Doesn't everyone want to beat the index? Isn't that a task more easily said than done?" I will tell you that based on my own experience and the experience of many others - you get the results for which you plan. All you need to do is have access to multiple distribution growth projections (for each MLP) and the supporting metrics that justify those predictions - and use those metrics in your MLP purchase decisions to acquire a diversified selection of higher distribution-growth MLPs.
Invest with distribution CAGR projection awareness
The last sentence already touched on this topic. Let's look at the correlation between high projected distribution CAGRs and year-to-date returns:
The following companies had CAGRs of 7.0% or more: ACMP, APL, BKEP, EQM, GEL, MMP, MWE, OILT, PAA, SXL, TLLP, WES and XTEX. Their mean price gain for the year is 8.71%. Their mean total return for the year is 9.83% - and 11 of the 13 beat the sector median yearly price gain.
The following companies had CAGRs between 7.0% and 4.5%: AMID, CMLP, DPM, EPD, HEP, OKS, SEP and WPZ. Their mean price gain for the year is 0.14%. Their mean total return for the year is 1.60% - and 4 of the 8 beat the sector median yearly price gain.
The following companies had CAGR estimates under 4.5%: BPL, BWP, EPB, EEP, ETP, EXLP, KMP, NS, RGP, TCP and TLP. Their mean price gain for the year is -6.79% (with BWP alone accounting for 431 bps of that decline). Their mean total return for the year is -5.18% - and 3 of the 11 beat the sector median yearly price gain.
Growth projections can dissipate - so be diversified in high-growth options
The poster child for this example is MarkWest Energy Partners. MarkWest still has high distribution growth projections. But the timing of that growth has pushed that growth further into the future after MarkWest provided 2014 guidance in the conference call. MarkWest is still selling at valuations that match an MLP that is growing in the here and now.
You can catch a falling knife - but I still believe that is still a high-risk strategy
Both Nustar Energy and its general partner Nustar Holdings (NYSE:NSH) have beaten sector average this year, as the DCF projections for NS rose with news from the conference call. That has caused the odds of a distribution cut to fall. That has been good news for both stocks. One needed to bet that the original DCF projections were wrong to capture this gain. I have assessed NS with a low DCF projection accuracy rating due to prior earnings disappointments. Positive earning surprises for NS have not happened since 2008. NS still finished 2013 with a large disappointment in earnings compared to the beginning-of-the-year projection. But it did finish with less of a disappointment than projected after the Q3 earnings call.
Some of you may be disappointed that this article fails to delivers some new revelations on MLP investing. The message from the numbers has been echoed in my prior articles. But as I have already noted, I find comfort in the redundancy of the story in the numbers. And so should you.
Finally, it is hard to do an article on MLPs without any mention of Enterprise Product Partners. The good news for Enterprise is that it was so predictable that it does not stand out. It has quietly beaten the sector average - but not by much. It continues to churn out 6% distribution growth. That is better than average - but not by much. Its 4% yield makes it lower-yielding than average. Why does 6% distribution-growing Enterprise merit a 4% yield and a "finally" mention? Because it is so boring and predictable. And those are very valuable attributes in an investment.
Disclosure: I am long CMLP, DPM, EPD, GEL, KMP, MMP, MWE, WES. 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.