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Market observer with legal background and interest in financial services, physical commodities trading, shipping and irrational exuberance. Values entrepreneurship and good governance, may also use some behavioral investment/contrarian criteria.
  • Boardwalk Pipeline Partners, The MLP/Full Payout Model, And A Small Investing Experiment 3 comments
    Feb 11, 2014 2:20 PM | about stocks: BWP, NMM, DSX

    I know nothing about midstream oil and gas MLPs. I know a bit the "MLP" model in marine transportation, where companies have tried to emulate the MLP funding model. The majority of them, if not all, are not true MLPs in the sense that international shipping is generally not subject to taxation in the first place. They just model themselves after the MLP paradigm and just pay out all or most of something they decide is "distributable cash".

    In shipping for example (my favorite example, in fact), Navios Maritime Partners (NYSE:NMM) runs out of cash from time to time. Today NMM announced another follow-on offering in order to survive its commitment to its distribution (which was more than obvious that could not materialize without fresh money) -

    Of course there is a known debate as to whether MLPs have ponziish elements since most, if not all of them, pay out much more in cash distributions than they earn as income under any type of GAAP. Constant follow-on offerings at inflated valuations refill the tank and everyone is happy.

    If you time it well, you may make a good short trade. In fact, follow-on offerings by definition become more frequent. But in general, investors love MLPs. They have been fabulously succesful, generally offering both capital appreciation but most importantly, distribution growth.

    Of course, it works until it doesn't. The train wreck at Boardwalk Pipeline Partners (NYSE:BWP) shows that anyone who bought at any of the previous 5 or 6 follow-on offerings lost a serious chunk of their "safe" investments.

    There is quite a bit of analysis on BWP on this site. Many argue that it was badly run and its assets mediocre.

    I bought some shares yesterday at $14 as an experiment. MLP funds, income oriented investors and bounce traders will continue to leave the stock. But I would really like to see what happens when management acknowledges that the semi-ponzi can't go on and start running a normal company.

    P.S. In shipping, just after the Great Recession Diana Shipping (NYSE:DSX) decided to cut its dividend. This was a huge surprise for investors, who left the stock in droves. But DSX had a habit of almost-full payout coupled with regular follow-on offerings. By stopping the dividend, they accumulated a huge pile of cash. Of course management uses other methods to skim the cash pile (mainly inflated costs) but the point is that deleveraging and cash accumulation protects your investment.

    Disclosure: I am long BWP.

    Additional disclosure: I am long BWP, sold to close $20 puts NMM today (after previously trying on Dec expiration), and have no position on DSX

    Stocks: BWP, NMM, DSX
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  • J Mintzmyer
    , contributor
    Comments (8868) | Send Message
    I remember our talk on Dec NMM puts. I didn't make the trade, but agreed with the logic.


    NMM has richly rewarded almost all of its shareholders (from almost all follow-on points) if you count total return.


    I got out of the position last spring, but I may buy into the company if they are forced to reduce distributions next year and the stock plummets to a 'fair' level ($8-$12)
    11 Feb 2014, 08:43 PM Reply Like
  • Adjusted Return
    , contributor
    Comments (394) | Send Message
    Author’s reply » Thanks for reading JM. Yes, NMM's fundamentals and share price seem to me to be going to opposite directions. Let alone income, they reached non-coverage of the distribution but the market supports them. I'm always surprised.
    This is in line with the argument that "MLPs have richly rewarded all shareholders if you count total return". Jusqu'ici tout va bien.
    Until the voluntary or involuntary crash. I just want to test a small theory with BWP that these cashflows could stay in the company, and that a value investor could eventually benefit.
    12 Feb 2014, 06:02 AM Reply Like
  • Adjusted Return
    , contributor
    Comments (394) | Send Message
    Author’s reply » My BWP experiment has gone more than OK proving that MLPs can bite the bullet, scrap issuing capital only to give it back, and rebuild. At the same time, NMM is again flirting with a share price so absurdly above its earnings or equity that proves that the MLP model is very resistant.


    NMM may try to issue again just because they can, but another shipping synthetic MLP that should do a secondary before announcing Q2 seems to be CPLP. They need a new and very big "accretive" deal as not only earnings will be close to zero for the year, even the cash distribution is at risk of not being covered. I saw no reason in the recent share run-up other than to prime the share price.
    27 Jun 2014, 05:10 PM Reply Like
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