MLPs Still Attractive After Recent Selloff

I hadn't planned on writing another MLP article so quickly after the prior one covering September. But in just the first few days of early October, MLPs have essentially gone through a very exciting year or two.

One week ago (this was written Monday, October 6, after another big sell-off) the Alerian MLP index was 241 after having fallen from 271 at the start of the September, making for one of its worst months. In the last week (including Monday), it dropped further to 190 (after reaching a low of 180 on Monday). That brings the total decline in a little over one month to one-third, eye popping especially for low beta securities. The 190 price was last seen 5 years ago and the decline raised the index yield to almost 11%, virtually matching the highest rates recorded back in 2000. The spread over the 10 year Treasury bond has exploded to 700+ basis points, 200 has been considered a common spread. Whew! That spread can not last, narrowing it requires higher MLP prices to reduce the yield and spread.

MLPs are noted for being low beta securities. It takes extra effort to remember that after the terrible sell-off in recent weeks. But these securities are going through an extraordinary period of rough times in stock markets adding to their beta.

Fundamentals for the business remain in tact. The basic business is to build and operate pipelines moving oil & gas, then collect tolls for using their pipelines. They get favorable tax treatment because this business is a national priority. Medium size MLPs may spend $1 billion annually on capital expenditures and financing for these long term projects are in place.

OK, it's not all upbeat. Going forward they will need more capital to build even more pipelines. Tightness in credits markets will probably pinch. However their capital expenditures are backed by hard assets (pipelines) making for attractive loans, but problems in the credit markets may require higher interest rates. Plus they will will have to sell units at depressed market prices which would add extra dilution. In a couple of weeks, they will be announcing distributions for Q4, chances are increases will be limited or distributions will be kept the same as in Q3 to preserve cash.

MLPs are long term investments. Their investments have very long lives, those who buy their units should be investing for the long term. Pipelines are expected to last 50+ years needing only minimal maintenance. Financing is in place, future financing may be a little more expensive but not at prohibitive rates. When yields on these securities are in double digits, just receiving income provides a nice yearly gain. Capital appreciation is a bonus. The decline in security prices are bringing outstanding buying opportunities for long term investors. Current times can be used most profitably by planning target buy points for selected MLPs. Five years and ten years forward, these prices and especially these record high yields will remembered with fond memories.

Stock position: None.

Comments

[CT Programmer:]

You should add OKS to your list of tags. I agree that these are good plays right now in the crazy market. They have stable cash flows, regardless of the price of the commodity running through their pipes. Even though we're likely heading into a significant recession, these guys provide stable dividends for those who sit and wait, and the prices will return to normal eventually. However, I would have changed the article's title to "MLP's MORE attractive after recent selloff".

2008 Oct 08 08:16 AM

[jamookey:]

They keep dropping CT.Some of it must be tied to etfs that are being sold off.Too bad because they are throwing out the good with the bad.It's a little scary,but hang in there.The author's article is right on.Fundamentals havn't changed.I have some 60k in mlps.Mostly I'm still up,but it does get a little scary to watch everything dropping so much everyday.

2008 Oct 08 09:28 AM

[DHS:]

I think the word "selloff" is a little weak. How about "crash" instead?

2008 Oct 08 10:23 AM

[CT Programmer:]

"Crash" assumes that the event has finished. Judging by today, it ain't over. Most of these are down a good number of points, after a few weeks of general decline. Not sure what's going on. I think "good" stocks are being punished in this market because they are the best thing to sell. I read something today that said hedge funds have liquidated about 20% of their total assets in the last month. That's a lot of selling. Personally, anything that pays me a dividend, and has a fwd PE below the S&P norm of around 15, is a double-gimmie. You eventually get both the dividends and the appreciation. And these MLP's have lower taxes.

2008 Oct 08 10:41 AM

[DHS:]

What are the best bets at this time assuming one has the cash to invest?

2008 Oct 08 10:56 AM

[CT Programmer:]

Best bets for MLP's, or for anything? As for MLP's, I have EEP, OKS and PGH. I won't claim they're the best... just the ones I picked up for various reasons. I like OKS's significant exposure to gas, but last time I checked we still needed to move oil around. Today they just seem to keep going down and down. Timing of bottom-fishing aside, they are good companies at a good price with good dividends. Read some of Avi's prior articles regarding the tax-handling of MLP's within or without an IRA. It gets a little muddy within an IRA.

As for good buys in general... take your pick. Fertilizer companies, copper miners, gold (maybe), dry bulk shippers, gas and oil producers. They're all down significantly as if they're going out of business, yet they all have solid cash flows and last time I checked Asia was still running red-hot (and China just lowered its rates!!!). I personally put a lot of stock (no pun intended) in Jim Jubak's list on MSN and read him regularly.

As a side note, I love how the press is saying that EEP is down 18% today because of the 2.4m fine. That happened last fall, and I read about that fine last week. I guess knee-jerk reactions are on a delay ;-)

2008 Oct 08 11:20 AM

[CT Programmer:]

Oh, quick note... I promise this is it then I'm out of here. When looking at PGH, they kick out dividends monthly, not quarterly, so just looking at their dividend amount is misleading. It's currently at 23% annually based on today's price.

2008 Oct 08 11:24 AM

[jamookey:]

Truthpeeler,take a look at NS.You get some exposure to Europe.I also like TYG,and SXL.

2008 Oct 08 04:04 PM

[User 258005:]

I agree that these are great buys, but I would add a cautionary note to buy only those with a lower debt to equity ratio, ( easily accessed on Yahoo finance) this group of MLPs yields around 10% but seem to be a little more stable.

2008 Oct 08 07:41 PM

[jcrash:]

FYI, about 10AM this morning you could've bought this basket and made around 10% by the close, for some reason they all got crushed early on with at least one down by 20%.

2008 Oct 08 09:08 PM

[doublebogey:]

I worked for Transco/Williams for 25 years. My old boss, an insider, just plunked down $300,000 on wpz in the open market. He is a very sharp guy and businessman. I own about $200,000 of these things, EPD,ETP,LINE,APL,EROC,... and the trusts SJT,HGT,PBT,BPT. I am way too concentrated in these things but I see almost no alternative in this market, and I agree with a previous poster that we have here a once in a generation opportunity thanks to overleveraged hegdefunds, the recent decline in NG, and the preception of risk due to these guys heavy debt and capital requirements. I also think people have been conditioned to fear any stock with what appears to be perhaps an unsustainable dividend, ala 20% for example. However we know these are not "normal" companies but the back bone of the NG infrastructure. Will they go down further? It appears so. Will they have to cut payouts to fund projects, perhaps tempoarily. But I contend, and I have bet nearly half my savings on it and will buy more when things settle down a bit, that if you are willing to hold these guys through this credit AND energy demand cycle which may take 5 years, that you will enjoy 20 - 40% annual returns. Will the ride be rough, probably. But these guys give you money to spend if need be while you wait out the crazyness. So best you can ignore the volitility, and when these guys are rediscovered dont be in hurry to sell when they get back to their old highs in a few years. Remember what you paid for them and your effective yield. There is going to be an explosion of natural gas usage in the country - GO BOONE and AUBRY. These companies for the most part only care about the put.

2008 Oct 08 09:08 PM

[User 276175:]

Here is one for you all to take a look at. Let me know what you think.
OSP
It has been beaten up bad. It was my first MLP and I cannot believe how it has gotten beaten up. I think todays distribution is 20% + Let me know what you think.

2008 Oct 08 09:50 PM

[goodtradetoday:]

MLPs were definitely on sale today -- huge intraday moves all across the board. Not knowing if I had to own it overnight, I had a huge gain in TYY. Other guys I knew loved the EEP opportunity they cashed in on. Still a huge amount of value for long term MLP investors.

2008 Oct 08 10:26 PM

[jmrxla:]

Plains All American, PAA. It has a low debt/equity ratio - excellent company. It is hard not to be fearful when the slide is so quick and abrupt. I think it is time to reinstate the Uptick Rule - too many good stocks getting slaughtered.

2008 Oct 08 10:31 PM

[Old Trader:]

CT,

PGH is a Canroy, NOT a MLP, (I used to own it...currently in PVX and PWE in Canroys). Seems like a lot of people get the 2 things mixed up. Canroys won't cause accounting problems within an IRA, MLPs might.

2008 Oct 09 12:33 AM

[CT Programmer:]

oldtrdr, you're absolutely right. My mistake. It is a trust. High dividends like the others, similar business, but not an MLP. Wasn't thinking.

2008 Oct 09 09:41 AM

[Mmarrkk:]

For safety, stick with the midstream MLP's that basically don't rely on gas prices. They get paid a fee for moving gas, in most cases. In some cases they get paid a percentage of what they move, which would make them sensitive to gas prices. Enterprise is a good one.

Also like LINE and LGCY, former being "gassy" and the latter being "oily". paying in the 15-20% range. LGCY is very conservative and doesn't take a leveraged extra "cut" like Kinder does. The guy running it is "good people", principled kind of guy from Midland TX. Not a slickster like others.

2008 Oct 09 10:06 AM

[Steve R.:]

I was wondering if a hedge fund blew-up of if a large account had a margin call???????? The MLPs were hitting really new lows and look to be a good buying opportunity, too bad we have to stay on the sidelines for a while. With this market new "opportunities" are surfacing each day!!!

2008 Oct 09 03:11 PM