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  • Kinder Morgan restructuring possible but not easy, Credit Suisse says [View news story]
    I read the report and am impressed by all the mental gymnastics, but at the end of the day, their analysis reminds me of medieval alchemy--I don't believe that shuffling around the corporate structure will boost gross cashflows of all entities combined or otherwise create net value.

    The CS yield-based cost-of-capital analysis is off-base as they simplistically ignore embedded growth expectations (they even admit this).

    At the end of the day, CS is suggesting that KMI should "take one for the team" to help out KMP's growth rate (and/or KMP should lever up with more debt) on the hope/prayer that it will somehow "be worth it" for KMI many years down the line.

    The CS analysis, as it acknowledges up-front, is ultimately pandering to short-term market sentiment ("do something, anything market perception demands, to get the unit price up NOW because we're impatient.") My view is that KM should continue to chug forward and execute on its business, maintain some proportionality between KMP and KMI with regard to sharing upside and disappointments (e.g. IDR waivers, rather than pull an ETP/ETE that screws the LPs). Market sentiment will take care of itself if the businesses perform.

    Those who want faster growth can simply split their investment between KMI/KMP as well as re-invest part of their quarterly distribution in more shares/units. That effectively gives you your own personal EPD/MMP/MWE-type investment structure without Kinder Morgan needing to make any changes.
    Apr 3 08:33 PM | 9 Likes Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    I expressly mentioned this phenomenon in the article. It's likely one of the reasons that distribution growth is temporarily slowing down for a couple of years. Yet, it's being taken as proof of a permanent slow-down in the secular growth trajectory.

    Yes, it's possible that cost overruns could jeopardize distribution growth prospects. Yet, it's happened before (Rockies Express), and they nonetheless recovered smartly. Also, Rich Kinder mentioned that they have made efforts to secure some level of customer protection on such risks (such as on Trans-Mountain).
    Apr 3 05:16 PM | Likes Like |Link to Comment
  • 6 Basic MLP Lessons From The Q1-14 Data [View article]
    Great idea for an article. GPs have really been running away from LPs the past year or two, and at some point, regardless of growth CAGRs, there has to be a relative valuation argument in favor of the LPs. PAGP vs. PAA is interesting in this regard. Also WGP vs. WES.

    This growth mania has been so strong the past two years, I think people have forgotten what happens to high multiple growth stocks when a bear market hits.
    Apr 3 02:48 PM | Likes Like |Link to Comment
  • 6 Basic MLP Lessons From The Q1-14 Data [View article]
    Great color, thanks. I'll look at some additional sources as you suggest and triangulate a bit more. Interesting comp on health care REITs estimates.

    That said, I do believe that EPD's growth rate is a heck of a lot higher than 6%. Their total return CAGR over the past 10 years is close to 20%. Some of the sell-side analysts in Q&A recently have also needled them about when are they going to start hiking the distribution faster.
    Apr 3 02:35 PM | 1 Like Like |Link to Comment
  • 6 Basic MLP Lessons From The Q1-14 Data [View article]

    Thanks for the responses; thoughtful points on your process.

    On EPD, I'm looking at Ron Hiram's work (also posted on SA)--some of the numbers the past couple of years have been distorted by one-off asset sales. He calculates a "sustainable DCF" that allows apples-to-apples comparisons and gets $2.83 for 2012 and $3.88 for 2013.

    I've reviewed Credit Suisse's current preliminary projections for 2014, 2015, 2016, and they are $4.48, $4.89 and $5.18. The only time frame where we see a projected growth rate around 6% are the (very preliminary) numbers penciled in for the distant out years.

    However, these estimates are almost certainly vastly understated not only based on historical growth trajectory/performance, but given that EPD (as announced at its Analyst Day) is spending, over the next couple of years, 4x the amount of capex necessary to sustain the current 6% rate of distribution growth. That means future DCF growth will certainly be much higher than 6% (just as it has been the past few years), which is why EPD's unit price has steadily grown in the high double digits per year for many years.

    Contrast this with KMP, a 5-6% distribution grower that really is only growing 5-6% per year (in terms of DCF per unit) and which management acknowledges is a long-term 5-6% grower.

    That's why KMP and EPD trade at a big yield differential. EPD is a high-growth MLP while KMP is a slow-growth MLP (partly due to IDRs, partly due to high payouts / dilution from new issues). Has nothing to do with the market rewarding stability / predictability. In fact, KMP, while very stable and predictable, has been out-of-favor lately partly on account of its perceived lack of growth and yields 7.5%. No true 6% grower in the MLP space gets bid up to a sub-4% yield multiple. Maybe for REITs and utilities.
    Apr 3 01:36 AM | 4 Likes Like |Link to Comment
  • 6 Basic MLP Lessons From The Q1-14 Data [View article]
    Hi Factoids,

    Some good observations in here. However, you mentioned that "average" MLPs (as opposed to high-growth MLPs) have underperformed the S&P500 the past two years. Question: Two years is not a long time, and of course, the past two years has been an environment of growth-chasing, risk-chasing froth in the capital markets generally.

    TSLA, LNKD, FB, etc. have outperformed the S&P500 the past two years, but I'm not sure that means our portfolios should be loaded up on these names.

    What makes you think that trend will continue? In 2011, the S&P500 returned zilch. What did the "average" MLP return in 2011?

    Lastly, on EPD, your analysis is woefully incomplete. It's not just predictability or safety (i.e. low risk premium) that has given EPD a low yield. As a matter of fundamental securities valuation, an MLP is properly valued on its price-to-DCF, not its distribution yield, regardless of how much of the cash is distributed or retained. EPD has massive excess coverage, so its valuation multiple on DCF is not as high as implied by the distribution yield. The other key factor is that it's growing the DCF (even if not the distribution, for now) at a very high clip (37% y-o-y). You seem to imply that EPD is a 6% grower and compare it to other 6% growers. This is a fallacy--EPD is (for now) growing way up in the double digits. It's likely that distribution growth will accelerate at some point in the future once growth capex opportunities diminish and management decides to return more cash to unit-holders rather than re-invest it.

    I like your hard-headed analytical focus on the numbers but would caution anyone reading this to look behind the numbers a little more closely rather than invest like a computer. The "story", the risk profile, the asset map, sub-sector fundamental backdrop, and intangible management quality / track record should be integrated into the hard quant analysis.
    Apr 2 09:36 PM | 6 Likes Like |Link to Comment
  • 2-Year Performance Comparison Of Selected MLPs [View article]
    Hi Ron,

    I generally love your work and your articles and follow you closely, but this sort of backward looking two-year price performance summary doesn't really add any value; if anything, it reinforces recency bias and should be avoided. I can glean this information just by skimming some stock charts; we all know what has done well the past two years--liquids-focused MLPs and G&P MLPs.

    Also, I'm not sure how the S&P 500's relative performance over the past two years is relevant--the S&P 500 is in a bubble and will produce disappointing long-term returns from here going forward whereas MLPs should do well (much like the 2006-07 situation in that regard). As an MLP investor, I'm not bothered at all by lagging short-term, unsustainable bubble S&P returns. I want to know where various stocks/MLPs are going, not where they've been.

    What would be more useful would be a table with your personal estimate (based on cashflow analysis and growth rate projections and also incorporating IDR drag) of current fair values for various MLPs. This would indicate likely upside to "fair value" going forward. Obviously, the various sell-side firms do this with price targets, etc., but I like to look at it from as many sources as possible, and you are very good with the numbers, particularly your adjustments for "sustainable DCF". Perhaps you could also assign a subjective business model / asset base / management quality / balance sheet "risk level" to each MLP.

    That would be a useful exercise, IMHO as I think most readers respect both your hard quant analysis and your overall intuitive judgment. I would also suggest ditching BWP and SPH at this point and replacing them with some more interesting / relevant MLPs such as perhaps MWE, ACMP, EEP, SXL and maybe GEL and WES. MWE, though I'm not long, is a really interesting case, IMHO.

    Keep up the good work!
    Apr 1 08:50 PM | 4 Likes Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    Targa surprising to the upside on already very high growth projections. Not exactly a sign that growth in the mid-stream MLP sector is "slowing down" is it?

    "A recent report from consulting firm ICF International suggests the need for an additional $641 billion in mid-stream energy infrastructure investments between now and 2035. According to the report, this implies average growth capital investment of $30 billion per year going forward whereas over the past 10 years, a period of exceptional growth, the industry has only invested $10 billion per year. In other words, secular growth appears to be accelerating rather than slowing down."
    Apr 1 04:44 PM | 2 Likes Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    Depreciated book value does not reflect the value of the assets. Many of the pipelines were built decades ago. The value of the assets is ultimately a function of the cashflows they can generate, not their historical cost.

    KMP has a debt-to-EBITDA of 3.7x while KMI has a debt-to-EBITDA of 4.9. Importantly, cashflows are very stable / non-cyclical.

    New projects are typically financed 50/50 debt and equity (LP units). Standard, conservative practice for any asset-heavy business with relatively stable cashflows.
    Mar 31 02:51 AM | 1 Like Like |Link to Comment
  • 5 Important Reasons To Avoid Canadian Oil Sands Now, Perhaps Forever [View article]
    That's an important dynamic--can you post a link to the report?
    Mar 29 08:04 PM | Likes Like |Link to Comment
  • Rising Risks For Dividend Growth Investors [View article]
    Most of the DG stocks don't have any growth to speak of and trade at high multiples. They're boosting their dividends only by increasing pay-out ratios and/or financial leverage (buy-backs). Look at the cashflows for PG--hasn't budged since 2007. The dividend increases are not sustainable and will continue to slow.

    Ditto with utilities. Ditto with REITs.

    Retirees are much better off in high-quality mid-stream MLPs where there's a secular growth boom that's likely to continue for many years. Cashflows per unit/share are growing rather than stagnating. Bellwether EPD grew its cashflow per unit by 37% last year and has been growing it consistently for many years. Show me a DG stock with that type of financial performance.
    Mar 29 04:33 PM | 2 Likes Like |Link to Comment
  • Citi names five core MLP holdings, upgrades two others to Buy [View news story]
    Wow, outside of EPD, that is a very curious selection of "core holdings".

    I would choose the following:

    - EPD;
    - MMP;
    - PAA/PAGP;
    - KMR/KMI;
    - WMB/ACMP;
    - ETE/SXL;

    When I think of "core holdings", I think of minimizing risk (i.e. stuff with superior asset bases, balance sheets, scale, diversification, stability and high quality management). You can then speculate around the margins with riskier stuff, small-caps, etc. I'm not sure what Citi is thinking of here.

    Obviously, the big challenge for most of these is finding an opportune entry point, as such points don't come along too often.
    Mar 29 12:41 AM | 2 Likes Like |Link to Comment
  • Blood In The Streets, It's Time To Buy Russia [View article]
    Gazprom has a P/E of 2, low debt and a gargantuan hard asset base. There's basically a floor there based on the value of that unique asset base--absent nationalization, Gazprom isn't going anywhere come hell or high water.

    Importantly, a quick skim of the financial summaries over the years suggests that despite corruption, fickle state policy, mismanagement, etc., it nonetheless operates to grow its cashflows/per share over time. In other words, this isn't like Petrobras--it's more like Sinopec. At a P/E of 2, and with international oil companies trading (on an asset comparable basis), according to some analyst reports, at 15x or 20x the valuation multiple of Gazprom, I'll take it.

    Also pays a good annual dividend though that's not the reason I bought it. It's a deep value play.
    Mar 28 03:05 PM | 3 Likes Like |Link to Comment
  • Blood In The Streets, It's Time To Buy Russia [View article]
    Yes, agree with the recommendation, and in fact, I bought some Gazprom a few days ago at 6.90.

    The sanctions are all theater--they're for show. Putin may slowly peel away some provinces in the Ukraine. West will do nothing about it.

    This will fade away . . . fait accompli.
    Mar 28 02:25 PM | 2 Likes Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    There's a link to a press report of the downgrade (with extensive quotes lifted from the Wells Fargo analyst, Michael Blum) in the article above (in the bullet "Wells Fargo"). The downgrades were very recent. Wells Fargo has most certainly been covering KMP for the past two years.
    Mar 28 01:08 AM | Likes Like |Link to Comment