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Elliott Gue

 
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  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    I did not say that drop-downs are contingent upon IDRs. And it's certainly true that sponsors get paid partly due to their stake in the LP.

    But, you will find that the vast majority of MLPs set up to grow via drop downs are structured with IDRs. If you look at the industry over the past few years you'll find that many of the fastest growing MLPs share a similar trait: they began their growth spurts as newly listed MLPs that are still in the low tiers of their IDR structure but have a sponsor with MLP-able assets. As the sponsor drops down assets to the MLP, they can quickly move the MLP through the tiers and generate even more rapid growth in their IDRs.

    More broadly, understanding IDRs and how they're calculated is important. That's why I wrote this article on the topic. However, IDRs are not the only fundamental factor of importance when analyzing MLPs. If you had ignored all of the MLPs with an IDR structure over the past five years you would have passed up on several of the best-performing MLPs of all.
    Dec 29, 2012. 03:16 PM | 1 Like Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    Thanks for the kind comments.

    SBR, PBT and CRT are all US royalty trusts, not MLPs. While I haven't covered these three before, I have written about the group in general on Seeking Alpha in the November 2, 2012 piece "US Oil and Gas Royalty Trusts: Good Buys for Disciplined Investors." http://bit.ly/TvmkOo

    I'll be writing more about trusts early in the New Year.
    Dec 28, 2012. 07:10 PM | 1 Like Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    I agree that some of the MLPs and LLCs that have eliminated their IDRs are solid investments and have posted impressive growth rates over the years.

    However, I disagree with you on the IDR issue and think there is considerable merit to the argument that IDRs offer an incentive for GPs.

    In fact, over the years some of the best performing and fastest-growing MLPs I've covered are drop-down growth MLPs. For anyone unfamiliar with drop-downs, I covered this concept in a free article on my website about MPLX LP (NSDQ: MPLX), a recent IPO http://bit.ly/VIEZ75 that's ultimatelty run by Marathon Petroleum Company (NYSE: http://bit.ly/rnof7p)

    Basically, these drop-down MLPs are typically set up by a company that owns a large number of assets that generate steady cash flows and are, therefore, ideal for the MLP structure. Typically the parent company IPOs the MLP with a few choice assets and acts as the General Partner. Over time, the GP sells its remaining MLP-able assets into the MLP (known as drop-downs) at prices that are immediately accretive to distributable cash flow and, therefore, distributions.

    One example of this is Western Gas (NYSE: http://bit.ly/UruCrM) and the MLP's GP Anadarko Petroleum (NYSE: http://bit.ly/Jr1Qou). WES went public in May of 2008 and was trading around $16 per unit. At that time, it was paying a quarterly distribution of $0.30 per unit.

    Over the ensuing years, it has received a steady stream of drop-downs from Anadarko starting with its December 2008 acquisition of the Hilight and Newcastle gathering system. As a result of the additional cash flows it generated from these new assets, WES has grew its distribution by 10% in 2009, 15.2% in 2010, nearly 16% in 2011 and 19% over the past year alone. Management expects growth of 15% next year as well. Since distribution growth tends to drive performance in this group, the stock has generated an annualized return of over 33% since its 2008 IPO, among the best in the MLP group.

    WES has grown consistently even as it has climbed straight through its IDR structure and is now in the high splits (above $0.45 Anadarko takes 50%). In fact, it is this very IDR structure that provided the incentive for Anadarko to continue dropping down assets into the MLP as the firm benefited directly from these deals in the from of higher fees.
    Dec 28, 2012. 07:03 PM | Likes Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    While it's true that some MLPs pay more than their cash flows and some have probably borrowed money to maintain their payout, that's definitely not true of most of the names in this group.

    One has to be very careful in defining and calculating what's meant by paying out more than they earn. I still see a lot of commentary out there that discusses earnings and earnings per share (EPS) with reference to MLPs and that's just plain wrong. Earnings measures include a host of non-cash charges like depreciation that must be eliminated before calculating a particular MLP's payout ratio.
    Dec 28, 2012. 04:10 PM | 1 Like Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    Thanks for the comment. No, the analysis doesn't include the temporary reduction in the MLP's IDRs the GP agreed to as a result of the Sunoco merger or the 2% GP interest.

    My goal was to explain how IDRs are calculated and what impact it has on an MLP's cash flows as I believe there's a lot of confusion out there about this.

    And, you're right MLP math can definitely fill up a spreadsheet.
    Dec 28, 2012. 04:06 PM | 2 Likes Like |Link to Comment
  • Profiting From A Second Golden Age For Refiners [View article]
    The intent of the article wasn't to detail every cost a particular refiner faces in converting crude into gasoline or diesel fuel but to explain the Crack Spread and the basic way refiners earn their profit. Crack spreads are the single most widely watched fundamental when it comes to the refining sector and if you plot a particular refiners profit margins against the crack spread you will find that they correlate nicely. Ignore them at your own peril.

    Moreover, the costs you mention such as transport, storage, labor etc aren't as relevant to an analysis of these companies. That's because these costs are smaller than the cost of feedstock, tend to remain relatively constant over time (certainly less volatile than oil prices) and would tend to be similar for refiners in a particular region of the country.

    When I analyze a sector or a particular stock, I tend to try and identify which fundamental factors catalyze movement in those stocks over time. In this case, the crack spread is far more important than labor costs.
    Dec 28, 2012. 04:03 PM | 6 Likes Like |Link to Comment
  • Profiting From A Second Golden Age For Refiners [View article]
    Thank you. PADD 2 (the Midwest) certainly benefits from the factors I outline here but I also think some of the benefit will expand into PADD 3 (the Gulf Coast) as additional pipeline capacity allows more oil to find its way from the inland to the coast.

    PADD 5 (the West Coast) appears to be the least attractive market for refiners here.
    Dec 28, 2012. 03:57 PM | 1 Like Like |Link to Comment
  • Profiting From A Second Golden Age For Refiners [View article]
    Thank you and all of the other commenters here for your kind words about my article.

    As I explain in a December 26, 2012 Seeking Alpha article "MLP Investing Basics: Incentive Distribution Rights Explained" http://bit.ly/X0hmxL Incentive Distribution Rights (IDRs) are fees paid by a limited partner (LP) to their general partner (GP) as compensation for managing the assets of the MLP.

    Because IDRs are based on the distributions paid to LP unitholders, they help align the interest of the LP and GP. In other words, the GP gets higher IDRs when the LP generates higher distributable cash flows for its unitholders. That said, IDRs do raise an MLP's cost of capital because the GP is essentially taking a share of the LPs cash flows.

    I have no specific knowledge why Alon decided not to include IDRs for the MLP they created. I'd assume that two factors influenced1. their decision:

    1. Alon USA Partners is one of the first of a handful of new variable distribution MLPs. Unlike traditional MLPs, these partnerships aren't set up to provide a minimum quarterly distribution and consistent growth over time but simply pay out the majority of their cash flows as distributions. Since investors aren't particularly familiar with this concept just yet, I suspect Alon wanted to sweeten the package a bit to make its MLP more attractive.

    2. Sine Alon already owns 84% of the MLP, they already have plenty of incentive to grow the MLPs' distributions over time.
    Dec 28, 2012. 03:54 PM | 2 Likes Like |Link to Comment
  • MLP Investing: Distribution Growth Trumps Yield [View article]
    Thanks for the compliment, Gary. I recently posted an extensive article on Energy Transfer Partners that may be of interest to you: http://seekingalpha.co...

    My publication also covers all 86 energy-related MLPs.
    Oct 30, 2012. 10:54 AM | Likes Like |Link to Comment
  • Why Energy Transfer Partners Is Cheap: It's Complicated [View article]
    Thank you for the kind comments about my work and I look forward to welcoming you as a new subscriber.
    Oct 18, 2012. 12:24 PM | 1 Like Like |Link to Comment
  • Why Energy Transfer Partners Is Cheap: It's Complicated [View article]
    Thanks for the comment. Although it isn’t illegal to hold MLP units in a retirement account, we’re firmly of the opinion that these securities are better-suited for taxable portfolios.

    For one, we prefer to hold securities that offer no tax protections in a retirement account and keep our MLP positions in a taxable account to take full advantage of their tax-deferral characteristics.

    Also, some of the net income that MLPs allocate to their unitholders is classified as unrelated business taxable income (UBTI). Each taxpayer has a $1,000 total annual allowance for UBTI paid into a 401(k) or IRA account; annual UBTI over this threshold could incur a tax liability. However, many MLPs generate negative or modest levels of UBTI, ensuring that you likely won’t have to lose sleep over this issue.

    If you exceed your annual UBTI exemption, you don’t need to file any additional forms with the IRS; the custodian of your IRA or 401(k) is responsible for filing a Form 990 and paying the tax out of your account’s funds. Most investors find that the above-average yields offered by MLPs more than compensate for any UBTI-related taxes.

    Some investors avoid these problems altogether by purchasing a close-end or exchange-traded fund, neither of which produce UBTI. These investment products also disburse normal, qualified dividends to their shareholders and report these payments on a Form 1099, eliminating any vexation that might arise from dealing with the unfamiliar Form K-1.

    However, these minor conveniences don’t make up for the biggest problem with closed-end and exchange-traded funds: portfolios that skew heavily toward names with the largest capitalization.
    Oct 18, 2012. 12:23 PM | 7 Likes Like |Link to Comment
  • Under Pressure: Profit Margins On North American Hydraulic Fracturing [View article]
    We'll know more after the Q3 calls but it seems to me that the overcapacity continues to grow given the continued drop in drilling activity targeting deep shale gas.

    The rate of pricing deterioration may begin to lessen in Q3 but I'd rather see concrete signs of a turn before trying to call a bottom in these stocks. Earnings estimates for HAL and BHI continue to take a hit heading into their quarters.
    Oct 9, 2012. 05:13 PM | 1 Like Like |Link to Comment
  • Under Pressure: Profit Margins On North American Hydraulic Fracturing [View article]
    That's true and it will ultimately push gas prices higher. However, I think the time frame for this is considerably after 2014. The thing is that the first plant or two will have only a modest impact because it will take time for exports to ramp up to a level that moves the needle on the supply glut.

    Also, keep in mind that there are a number of dry gas basins in the US (little liquids content) like the Haynesville, Barnett, Montney in Canada and part of the Marcellus Shale that have been essentially moth-balled as producers scale back drilling activity due to low gas prices. As demand for exports ticks up and prices begin to rise, I'd expect these plays to come back on stream, pushing supplies higher.

    Bottom line: while I believe your sentiment on LNG exports is directionally correct I think it will take longer than 2 years to get back to 6 to 8 dollar gas.
    Oct 9, 2012. 05:08 PM | Likes Like |Link to Comment
  • Under Pressure: Profit Margins On North American Hydraulic Fracturing [View article]
    Thanks for the comment. They did sound rather upbeat but I can't think of any reason they would be taking share.

    One thing that strikes me is that HAL and BHI also sounded more upbeat on the potential for a bottom in pressure pumping margins than Schlumberger (SLB). Since SLB is not that exposed to pressure pumping, they have less of an incentive to sound optimistic so I wonder if some of that upbeat tone might be wishful thinking.

    Long: $SLB
    Oct 9, 2012. 05:04 PM | Likes Like |Link to Comment
  • Under Pressure: Profit Margins On North American Hydraulic Fracturing [View article]
    It's tough to say for certain but I do think pricing will continue to deteriorate at least through the balance of 2012. The key catalyst for the pressure pumping levered stocks like $HAL and $BHI will be margins finding a bottom and I'll keep looking for signs of that as I listen to Q3 and future quarterly conference calls.

    For now, I like stocks in the oil services and equipment industries that are focused offshore and/or in international markets.
    Oct 9, 2012. 01:30 PM | 1 Like Like |Link to Comment
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