Energy MLPs and Royalty Trusts Analysts Love

When Pioneer Resources (NYSE:PXD) spun off its lucrative pipeline business, creating the Master Limited Partnership [MLP] Pioneer Southwest Energy Partners (NYSE:PSE), I was one of the lucky investors who was able to participate in the offering.

Of course I didn't get all the shares I had indicated for so we bought the rest in the secondary market (the IPO was priced at $19 and we were able to buy the rest around $19.25). We were told the initial pay out yield would be around 9% or higher, and having been a former shareholder of PXD we were favorably predisposed to this company's reputation.

Now at least five and perhaps 6 brokerage firms started PSE with their highest rating citing its attractive valuation, high quality assets, lack of debt, and its affiliation with sponsor Pioneer Natural Resources. Since then the shares have shot up over 6%, recently reaching a new high.

Pioneer Southwest is a Master Limited Partneship [MLP] formed by oil and gas explorer Pioneer Natural Resources to own producing oil and gas properties in West Texas and to acquire oil and gas assets in its area of operations.

"Pioneer Southwest is a high quality upstream MLP with a visible growth profile, strong sponsor, and stable base of low decline crude oil reserves located in the Permian Basin," Wachovia analyst Michael Blum said in a research note.

Citigroup analyst Richard Roy said, "While the trading of Pioneer Southwest Energy Partners units is being impacted by the malaise in the sector, the partnership is not suffering from integration, overhang and leverage issues relative to its peers.

"As a result, given the benefit of hedging, strong underlying fundamentals, and favorable long term acquisition economics, we believe the valuation is attractive at current levels."

Roy added Pioneer Southwest to his "Top Picks" list.

UBS analyst Ronald Barone said, "We view Pioneer Southwest's affiliation with Pioneer Natural Resources as a key benefit, particularly since Pioneer Natural Resources controls estimated proven reserves of 558 mmboe (million barrels of oil equivalent) in Pioneer Southwest's core area."

Barone also said Pioneer Southwest should enjoy flexible financing options, aided by its initially debt-free capital structure. This would create an advantage for the company as it competes for upstream asset acquisitions.

Pioneer Southwest is a Master Limited Partneship [MLP] formed by oil and gas explorer Pioneer Natural Resources to own producing oil and gas properties in West Texas and to acquire oil and gas assets in its area of operations.

"Pioneer Southwest is a high quality upstream MLP with a visible growth profile, strong sponsor, and stable base of low decline crude oil reserves located in the Permian Basin," Wachovia analyst Michael Blum said in a research note.

Citigroup analyst Richard Roy said, "While the trading of Pioneer Southwest Energy Partners units is being impacted by the malaise in the sector, the partnership is not suffering from integration, overhang and leverage issues relative to its peers.

"As a result, given the benefit of hedging, strong underlying fundamentals, and favorable long term acquisition economics, we believe the valuation is attractive at current levels."

Roy added Pioneer Southwest to his "Top Picks" list.

UBS analyst Ronald Barone said, "We view Pioneer Southwest's affiliation with Pioneer Natural Resources as a key benefit, particularly since Pioneer Natural Resources controls estimated proven reserves of 558 mmboe (million barrels of oil equivalent) in Pioneer Southwest's core area."

Barone also said Pioneer Southwest should enjoy flexible financing options, aided by its initially debt-free capital structure. This would create an advantage for the company as it competes for upstream asset acquisitions.

According to a Reuters report there were specific price targets given by five of the brokerage firms which initiated coverage on PSE.

Following are the five brokerages ratings and price targets on Pioneer Southwest Energy Partners LP:

• Citigroup Buy $25.50
• UBS Buy $25.00
• Wachovia Outperform -
• RBC Capital Markets Outperform $26.00
• Raymond James Outperform $24.00

Another MLP we own and like very much is TC PipeLines (Nasdaq:TCLP) which together with its subsidiaries, transports natural gas from the western Canada ) Basin [WCSB] to various downstream markets in the United States.

It owns a 46.45% general partner interest in Great Lakes Gas Transmission Limited Partnership, which owns a 2,115 miles natural gas pipeline system that extends across Minnesota, Northern Wisconsin, and Michigan and redelivers gas at the Canadian border at Sault Ste. Marie, Michigan, and St. Clair, Michigan.

The company also owns a 50% general partner interest in Northern Border Pipeline Company that transports natural gas through a 1,249 miles of pipeline, which provides pipeline access to the midwestern United States from natural gas reserves in the WCSB. It's yield is currently over 7% and it returns capital as well.

While on a related topic, now is also a good time to mention Hugoton Royalty Trust (NYSE:HGT) which creates an income stream that few investments can offer.

HGT operates as an express trust in the United States. It holds 80% net profits interests in certain natural gas producing working interest properties, owned and operated by XTO Energy, Inc. (NYSE:XTO).

XTO Energy engages in the production and sale of oil and gas in the Hugoton area, which covers Texas, Oklahoma, and Kansas; the Anadarko Basin of western Oklahoma; and the Green River Basin of southwestern Wyoming.

As of December 31, 2007, the company owned interests in 408,636 gross producing acreage of developed property, as well as in 54 gross oil producing wells and 1,540 gross gas producing wells. XTO Energy had proved reserves of 405,473 thousand cubic feet of gas and 3,645 barrels of oil. Hugoton Royalty Trust was founded in 1998 and is based in Dallas, Texas.

Having just reached a 52-week high of $34.70 it is challenging to estimate the upside potential of this trust. Frankly, if there is at least a 5% correction I'm personally intending to buy more. I'd also like to buy some XTO on a correction...if one actually develops.

These income-producing MLPs and Royalty Trusts are like cash cows waiting to be gently milked for all they are worth. And like a good producing bovine, their udder keeps filling up with sweet "milk" shortly thereafter.

Disclosure: Long

Comments

[Kittie:]

Someone needs to learn how to spell "udder".

2008 Jun 16 04:13 PM

[redbaron:]

Great articles, and I don't mind the spelling.......it's the ideas that are important, and these are great!

2008 Jun 16 07:19 PM

[Ahusker:]

The first sentences of paragraphs one and four are contradictory. Did they spin off the pipelines or oil and gas producing properties. Per the prospectus, they spun off oil and gas producing properties, thus this MLP is much more commodity price sensitive that a pure pipeline MLP. To buy SPE you'd be speculating on the price of oil and gas. Ahusker

2008 Jun 16 07:40 PM

[bsharvy:]

That misspelling was udderly ridiculous. HGT is a pure dividend play, and its dividend is a pure play on the price of natural gas. So, Ahusker's point about SPE applies to HGT too. I'm not inclined to be bullish on oil/gas prices right now. There's just too much speculation.

On another note, since these are big dividend paying stocks, it's useful to have info about suitablity for tax-sheltered accounts. As I understand it, US royalty trusts are logical choices, since their divdidends are not "qualified." But LP's are poor choices because of complicated tax laws I don't fully understand. Can anybody point us to a clarification of these matters?

2008 Jun 16 08:38 PM

[aoxomoxoa:]

After November, they BETTER be tax-sheltered!

2008 Jun 16 09:07 PM

[User 107545:]

Please discuss tax issues when refering to MLP's. Canada, for instance, has created a tax mine field for those who own MLP stock, but do no reside in Canada. I have studied the issue and still am not sure that even a Roth IRA can be taxed at some point in the future.

Thank you.

Gerald Boyle

2008 Jun 17 08:20 AM

[ironist15:]

Check with your accountants, but my understanding is that LPs and MLPs should not be held in IRAs because they generate unrelated business taxable income (UBTI) which can't be tax-deferred or sheltered. Non-qualified dividends are taxed as ordinary income, but most MLPs (unlike REITs) offer qualified dividends as far as I know - you should check their websites for guidance on that.

2008 Jun 17 10:11 AM

[jjc7477:]

Nice article Marc. How do you feel about BPT as a royalty trust? Does it still have legs?

2008 Jun 17 10:29 AM

[Davo:]

Hey aoxo... I am not as pessimistic about November. Get out and work for the permanent tax-reduction candidate.

2008 Jun 17 12:08 PM

[Davo:]

Hey Kittie, You caught udder-utter at the end of the article. How did you miss "it's" in the first line? Look for the forest not the trees.

2008 Jun 17 12:12 PM

[lsuavecito:]

>>How did you miss "it's" in the first line?<<

Begging your pardon; however, "its" is spelled properly. The apostrophe is used, only, with the contraction, it is.

2008 Jun 17 12:29 PM

[Davo:]

It was changed after my comment. It was originally it's. It also is a contraction for it has.

2008 Jun 17 12:54 PM

[Davo:]

Notice that udder was also changed after the original comment.

2008 Jun 17 01:09 PM

[SA Editor J...:]

Seeking Alpha editors have been known to make changes if they are caught/reported after publishing so if you see a comment about an error and then see the error is no longer there, assume that is what happened.

2008 Jun 17 01:21 PM

[Itsonlymoney:]

I'm buying 500 UDDER at the open.

2008 Jun 17 01:46 PM

[Urbane Gori...:]

I do agree that if you are going to author and publish, it doesn't hurt to spell-check ..... However, if you are going to critique, then please review your own use of the language;

"That misspelling was udderly ridiculous." ..

Udders belong on cows.. I suspect you meant 'utterly'...

Thx jegan ;-)

2008 Jun 17 03:14 PM

[Marc Courtenay:]

I will never misspell "udder" again. As to the question on BPT, the payout and price-per-share performance has certainly been exceptional. That being said, I'd be tempted to take some of my money off the table if I owned shares (units) as there is a decent chance of a meaningful pullback over the next few months. Yet with a generous payout like they've maintained, the downside risk is partially covered. This is what the company says about their reserves, "As of December 31, 2007, its estimated, net remaining proved reserves were 97.8 million barrels of oil and condensate, of which 86.87 million barrels were proved and developed reserves, and 10.93 million barrels were proved undeveloped reserves." Perhaps due to price considerations most analysts can't give BPT a higher rating than a "hold". So I'm utterly baffled on whether this cash cow has "legs".

2008 Jun 17 04:28 PM

[Loup-Garou:]

3645 barrels of oil in reserves? Wow.

Will mortgage my children to raise cash to buy this one.

2008 Jun 17 06:46 PM