Akaralph's  Instablog

How will the acquisition of Encore by Denbury Resources affect ENP? That remains an interesting question after watching EAC's rise of 35% or so the other day after the announcement.

If you follow ENP as I do, you know that they recently increased their quarterly distribution. It would appear that Denbury will continue as the new general partner for ENP, and that ENP will continue their E&P activites in the west, the Permian Basin and in North Dakota's Williston Basin.

I would think that ENP's operations would complement the Denbury operations in the Gulf Coast, and that after the acquisition is completed it would be beneficial going forward. Based upon this, I can only think that ENP's shareholders will continue to benefit from a stream of increasing distributions going forward.

Of course, now that Jim Cramer has warned that this deal is a bad one I am even more encouraged.

Disclosure: I am long ENP.

Three of my favorite MLP's came through!

ENP released earnings and distribution information on 10/27 and pleased its shareholders with a nice distribution increase. The distribution for the present quarter was raised from $0.513 to $0.5375, or 4.8%. Distributable cash flow was $34.4 million and the distribution coverage ratio rose to 1.40. Hard to complain about these type results in today's economy.

NRGY, while not scheduled to release earnings until 11/30 announced its 32nd consecutive quarterly distribution increase. The distribution was increased from $0.665 to $0.675, or 6.3% above the same quarter last year.

EVEP on 10/27 announced a quarterly distribution of $0.754, only a marginable increase ($0.001) over the previous quarter. However, at today's price of $24.36, this represents an annualized yield of 12.38%. EVEP continues to rate high among the exploration and production MLP's.

Keep your eyes on these, as with oil and NG having the potentials to continue to rise, they are money in the bank.

Disclosure: I am long ENP, NRGY and EVEP.

Being a huge advocate of income investing (with a little growth tacked on), I have long been an advocate of Master Limited Partnerships, particularly those involved in midstream energy activities. For the uninitiated, midstream activities include oil, natural gas, natural gas liquids pipelines and storage facilities.

For my own portfolio, I try to focus on the pipeline companies, since they are least affected by commodity pricing. However, the OIL and NG transporters are directly affected by the quantities carried through the pipelines. When supplies increase, less product is transported, and vice versa.

With the recent increase in crude oil prices to the $80 level, and with seasonal demand soon to result in higher NG prices, the upstream (exploration and production) MLP's have recently been the beneficiaries of price appreciation.

During the recent market downtown MLP's took significant hits; however, just about all of them maintained, or slightly increased quarterly distributions. Beginning in March of this year MLP's began a steady and sharp increase in share prices, which, in my opinion was due in part to recognition by institutional and retail investors that distributions were a constant source of income. This was in comparison to real estate investment trusts, business development corporations and many closed-end funds having to resort to dividend reductions, or, in some cases complete elimination.

The evaluation of energy MLP's cannot focus solely on quarterly earnings since they are tax shelters, and by design are not intended to be generators of taxable income. It is better to focus on the distribution and the distribution coverage ratio. For example Teppco Partners (TPP) has an unbroken string of increased distributions since their inception in 1990. Recent announcements for the quarter ending September continue to support distributions the same, or slightly higher that the prior quarter, or quarter over quarter versus prior years. The coverage ratio gives an indication of distribution "protection", and can be found in the financial portion of the quarterly earnings release. A coverage ratio of 1.00 is the minimum to consider when seeking to purchase an MLP. Many of the pipeline and upstream MLP's presently sport coverage ratios in the range of 1.15 to 1.35, which is a good indication that distributions should continue at least at present levels.

As far as selecting price points at which to commit new funds to MLP's, the past six months MLP appreciation of anywhere from 50% to over 100% make the choice a difficult one. During the past week it has become evident based upon distribution announcements that MLP's continue on a positive pathway. Some consolidation within the midstream segment is occurring - of note is the acquisition of TPP by Enterprise (EPD), at a fair premium. 

Thus far, of the MLP's that I track, and/or own CPNO, CQP, LGCY, NGLS, and NRGY have all announced quarterly distributions the same, or slightly higher than for the quarter ending in June. CQP is an interesting play as they will soon complete the first LNG terminal facility in the United States. A number of analysts have recently maligned CQP, citing the potential for a distribution reduction. However, this criticism can be brought into question by a quick review of their projected revenues and earnings for the next year. It would seem that there is potential for increasing distributions, particularly subsequent to the initiation of operations. A second MLP that I still favor is NRGY, a propane distributor and NG storage operation who just this morning announced their 32nd consecutive increase to the quarterly distribution

I would also closely watch TLP, WPZ, MMP, NGLS and CPNO for opportunities to buy, or add to existing positions on any market pullback.

Disclosure: I presently have positions in CPNO, CQP, ENP, EVEP, LGCY, NGLS, NRGY, PVR and TPP.