Is Kayne Anderson The Best MLP Play Right Now?

Aug.20.14 | About: Kayne Anderson (KYN)

Summary

MLPs have received a lot of extra attention recently due to the announced Kinder Morgan Consolidation.

MLPs have given my best returns as a lot during the current market upswing.

Are MLP Funds a better play than holding the MLPs directly?

I have several MLPs, REIT's and Investment Trusts in my trading portfolio. I had several more in 2013 before a forced liquidation at the beginning of this year due to cash-flow need. An aggravation that I had near tax time was there was one holding within my portfolio that had not filed their K-1, so I could not file MY taxes until the first week of April. I assumed this was related to one of my MLP holdings (at the time I did not actually enquire as to which holding was causing the problem with my broker) and held that belief until recently when I learned it had, in fact, been one of my other portfolio darlings, KKR and Co LP (NYSE:KKR). Shame on you KKR. I still love you though.

What is interesting about the above anecdote was that it foisted on me the idea that perhaps I was better off selling out of my remaining MLPs and consolidating my holdings with Kayne Anderson MLP Investment Company (NYSE:KYN), as the tax implications from being a general partner in the MLPs could be skipped but the obvious advantages of the MLP in the energy-related master limited partnership space could be maintained. This was the first sector my current portfolio was built on, and in fact the holding I have made my biggest gains on since the financial crisis in 2008 has been Sunoco Logistics Partners L.P. (NYSE:SXL). Additional benefits of KYN include that it is a suitable investment for IRA's and tax-exempt accounts because unlike the MLPs it invests in, KYN does not generate unrelated business taxable income.

The recently announced consolidation of Kinder Morgan's (NYSE:KMI) various entities into the single parent is being seen by some as the beginning of the end of the MLP industry. Richard Kinder, the Chairman and CEO of KMI, is viewed by many to be the father of the MLP industry in it's current phase, so consolidating the expansive KMI operation into a single company gives the false impression that this is the wave of the future. This would go counter-intuitive instead to the pattern being seen with ConocoPhillips (NYSE:COP) and Phillips 66 (NYSE:PSX) as one opposite example.

Putting the tax advantages aside in the comparison of KYN and SXL, let us try and find which would make the better buy right now.

SXL has a somewhat weak Analyst Recommendation Mean Score of 2.8, which would be a red-flag for me as I tend to avoid anything with a score higher than 2.5. The price-to-book is a shade below 2.00 at 1.91, which is not ideal. The most recently announced EPS was down on the year and compared to the same quarter last year. The PEG ratio is more than 3x my normally accepted limit at 6.38. At today's closing price of $48.60 it sits less than 1% below the 52 week high, but this is after a 55.72% increase over the last year and 31.92% of that coming since January 1, 2014. It is very likely that the best entry point for SXL would have been sometime in between May to early August of this year when the trading pattern created a classic head and shoulders pattern, with the beginning of July representing the head. During that period of consolidation SXL could have been purchased near the $45 support line.

KYN has the absolute best possible Analyst Recommendation Mean Score of 1.00, and is trading at the nearly even price-to-book of 1.07, which presents a much better value than compared to SXL, and the consensus target price of $51.00 represents a 22% increase from today's closing price of $39.69. Insiders are buying up a lot of shares as well. Even without the tax advantages, it is clear that KYN is the winner of this match-up hands down. What may be more interesting is determining whether KYN is the best MLP fund available, which is something I endeavor to do very soon. I will continue adding to my holdings of KYN (and KKR despite it's poor effect on my tax filing) as the opportunity presents itself.

The last bit of food for thought, KYN's Top 10 holdings (as of 7/31/14)

  • Enterprise Products Partners L.P. 9.1%
  • Regency Energy Partners LP 6.0%
  • MarkWest Energy Partners, L.P. 5.4%
  • Plains All American Pipeline, L.P. 5.3%
  • Kinder Morgan Management, LLC 5.2%
  • Williams Partners L.P. 5.1%
  • Energy Transfer Partners, L.P. 5.0%
  • DCP Midstream Partners, LP 4.5%
  • ONEOK Partners, L.P. 4.2%
  • Crestwood Midstream Partners LP 3.1%

Total Percent of Top 10 holdings: 52.9%

Disclosure: The author is long KYN, SXL, PSX, COP, KKR, KMI.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.