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I am a private investor who has invested in individual stocks for over a decade. I have a BBA from the University of Texas at Austin. I am retired and living off of dividends and distributions from a portfolio of BDCs, consumer staple stocks, MLPs, regional banks and REITs.
  • MLP Midstream Stats And Valuation Assessments 15 comments
    Jul 19, 2014 10:48 AM
    MLP Midstream 07-18-14

    The consensus DCFs were last updated on 06-14-14. The CAGR projections were updated 6-30-14. Yields are based on the Q2-14 distribution. Under the 'year to date' header, the change in the distribution is the change since Q2-13 - or the change over the last twelve months. The change in the target, EPS, DCF and CAGR is the percentage change in the consensus 2014 projection that has happened since the beginning of the year. OILT and SXL have had price splits that are not reflected in this data.


    Company   Current Distrib/ Q2 Dist Dist/dcf Dist/dcf Year-to-Date Percent Change
        Price Quarter Yield 2014 2015 Price Pr+Dist EPS Target DCF Dist* cagr

    Access Midstream Partners, L.P. (NYSE:ACMP) 63.12 0.5750 3.64 70.12 66.47 11.56 13.59 -3.11 21.55 1.86 23.13 0.00
    American Midstream Partners, LP (NYSE:AMID) 29.23 0.4625 6.33 97.88 84.09 7.94 11.36 0.00 17.32 -8.70 6.94 40.00
    Atlas Pipeline Partners, L.P. (NYSE:APL) 35.29 0.6200 7.03 91.85 85.22 0.68 4.22 -95.24 -14.60 -8.47 5.08 4.29
    Blueknight Energy Partners, L.P. (NASDAQ:BKEP) 8.90 0.1300 5.84 67.53 55.32 4.58 7.64 -56.60 0.00 -25.24 10.64 2.35
    Buckeye Partners, L.P. (NYSE:BPL) 81.81 1.1000 5.38 95.86 87.30 15.21 18.31 -0.54 9.04 -2.34 4.76 20.00
    Boardwalk Pipeline Partners, LP (NYSE:BWP) 19.27 0.1000 2.08 24.24 23.67 -24.49 -23.71 -22.31 -36.76 -16.67 -81.22 0.00
    Crestwood Midstream Partners LP (NYSE:CMLP) 23.40 0.4100 7.01 93.71 84.97 -5.99 -2.69 -26.79 -7.01 -5.41 3.80 16.67
    DCP Midstream Partners LP (NYSE:DPM) 57.29 0.7450 5.20 93.71 83.94 13.78 16.74 -7.08 6.88 -3.34 6.43 4.48
    El Paso Pipeline Partners, L.P. (NYSE:EPB) 35.71 0.6500 7.28 97.74 95.94 -0.81 2.81 -16.50 -10.66 3.10 4.84 8.70
    Enbridge Energy Partners, L.P. (NYSE:EEP) 35.33 0.5435 6.15 106.57 100.18 18.28 21.92 -14.29 10.08 -3.77 0.00 33.33
    Enterprise Products Partners L.P. (NYSE:EPD) 77.82 0.7100 3.65 67.62 64.99 17.38 19.52 5.03 12.87 1.20 5.97 0.00
    Energy Transfer Partners, L.P. (NYSE:ETP) 56.79 0.9350 6.59 81.30 83.86 -0.80 2.46 12.35 4.35 -1.92 4.62 8.11
    EQT Midstream Partners, LP (NYSE:EQM) 95.08 0.4900 2.06 57.65 46.12 61.73 63.40 21.76 54.50 9.68 32.43 1.05
    Exterran Partners, L.P. (EXLP) 28.94 0.5375 7.43 78.75 83.01 -4.27 -0.71 -41.27 5.99 4.60 3.86 0.00
    Genesis Energy LP (NYSE:GEL) 55.77 0.5500 3.94 78.85 67.90 6.09 8.18 -19.79 5.90 -5.10 10.55 4.65
    Holly Energy Partners L.P. (NYSE:HEP) 34.15 0.5075 5.94 89.43 83.20 5.63 8.77 5.08 1.78 3.65 6.28 0.00
    Kinder Morgan Energy Partners, L.P. (NYSE:KMP) 82.64 1.3800 6.68 97.87 94.68 2.45 5.88 1.84 -3.95 -1.57 6.15 -31.91
    Magellan Midstream Partners LP (NYSE:MMP) 85.04 0.6125 2.88 72.27 66.04 34.41 36.34 18.71 35.26 10.42 20.69 2.27
    MarkWest Energy Partners, L.P. (NYSE:MWE) 73.85 0.8700 4.71 89.23 75.65 11.67 14.31 -45.68 -7.58 -10.14 4.82 -12.64
    Targa Resources Partners LP (NYSE:NGLS) 69.99 0.7625 4.36 77.02 73.49 33.82 36.74 55.63 20.82 12.82 9.32 7.25
    NuStar Energy L.P. (NYSE:NS) 65.11 1.0950 6.73 107.88 97.77 27.69 31.99 6.99 22.70 6.56 0.00 6.67
    ONEOK Partners, L.P. (NYSE:OKS) 57.87 0.7450 5.15 89.22 82.78 9.91 12.74 9.67 5.21 0.00 4.20 0.00
    Oiltanking Partners, L.P. (NYSE:OILT) 100.00 0.4950 1.98 58.41 51.03 61.11 62.70 -7.57 53.52 20.21 22.22 19.48
    Plains All American Pipeline, L.P. (NYSE:PAA) 59.07 0.6300 4.27 86.01 78.50 14.10 16.53 -8.24 3.35 -6.39 9.57 0.00
    Regency Energy Partners LP (NYSE:RGP) 31.98 0.4800 6.00 93.66 84.21 21.78 25.44 -5.77 11.36 -0.97 4.35 25.00
    Spectra Energy Partners, LP (NYSE:SEP) 53.68 0.5563 4.15 83.65 83.97 18.37 20.82 5.08 13.02 3.10 10.97 -1.54
    Sunoco Logistics Partners L.P. (NYSE:SXL) 91.14 0.6950 3.05 63.33 59.66 20.75 22.59 -4.67 28.43 -4.77 21.40 1.12
    TC PipeLines, LP (NYSE:TCP) 52.38 0.8100 6.19 85.26 83.08 8.16 11.50 14.59 5.34 2.70 3.85 -10.00
    Tesoro Logistics LP (NYSE:TLLP) 71.89 0.5900 3.28 85.51 71.52 37.35 39.61 5.49 20.81 -10.10 20.41 5.88
    Transmontaigne Partners L.P. (NYSE:TLP) 43.75 0.6600 6.03 70.59 77.65 2.94 6.05 -5.86 2.62 6.86 3.13 -6.67
    Western Gas Partners LP (NYSE:WES) 78.60 0.6250 3.18 79.37 69.44 27.41 29.44 0.87 9.14 3.28 15.74 0.00
    Williams Partners L.P. (NYSE:WPZ) 53.56 0.9045 6.76 97.00 90.45 5.31 8.87 -10.28 6.50 4.48 6.73 -1.85
    EnLink Midstream Partners, LP (NYSE:ENLK) 31.56 0.3600 4.56 95.36 77.42 14.35 16.96 2.17 16.71 -3.82 9.09 2.35

    Pipeline Average     5.02 82.56 76.17 14.49 17.28 -6.86 9.83 6.46 6.69  
    Shipping
    Navios Maritime Partners L.P. (NYSE:NMM) 19.26 0.4425 9.19 111.32 97.25 0.73 5.36 -4.11 8.48 -9.14 0.00 0.00
    Martin Midstream Partners LP (NASDAQ:MMLP) 41.08 0.7875 7.67 95.45 82.03 -4.02 -0.34 -1.25 -0.84 -5.17 1.61 6.06
    Teekay LNG Partners LP. (NYSE:TGP) 45.00 0.6918 6.15 93.49 90.14 5.36 8.60 12.62 2.57 0.34 2.49 0.00

    Shipping Average     7.67 100.09   0.69 4.54 2.42 3.40    

    MidStream Average   5.24 84.02 77.30 13.34 16.22 -6.09 9.30    

    The (price change only) Alerian MLP index [the ^AMZ - which includes other MLP sectors] is 12.31% year to date.
    The Alerian MLP index ETN AMJ is 12.25% and with dividends is 14.73%.
    The S&P500 index ETF SPY is 7.05% and with dividends is 8.00%.
    The Russell 2000 index ETF IWM is -0.98% and with dividend is -0.72%.
    With the 10yr Treasury @ 2.48% & the sector average yield [on Q2 distrib's] at 5.24% - the spread is 276 bps.
    With the JNK yielding 5.67% - spread to the Lehman U.S. High Yield Index is -43 bps.
    With the HYG yielding 5.40% - the spread to the iBOXX High Yield Index is -16 bps.

    Based on most valuation metrics, it is a sub-optimal time to buy. If you must buy, the following spreadsheet should be a good guide for those purchases. If you are one of the many who don't "get it" when I write that valuation assessments should be made on the basis of "yield + CAGR - RRR", then this would be a good time to address those questions. I will make an effort to reply to all "liked" questions.

    Yield + CAGR Total Return Expectations


    Company Q2-14 Consensus Total Bonds DCF My Total Rtn Consensus Pr Impl Distribution
        Yield CAGR Return Ratings Accr RRRs - RRR Ratings CAGR /14 DCF
    Large Cap Midstream
    Buckeye Partners, L.P. BPL 5.38% 4.80% 10.18% BBB- 2.50 10.40 -0.22 2.6 5.02 95.86
    Boardwalk Pipeline Partners, LP BWP 2.08% 1.00% 3.08% BBB- 4.00 10.70 -7.62 3.1 8.62 24.24
    El Paso Pipeline Partners, L.P. EPB 7.28% 2.50% 9.78% BBB 1.20 10.30 -0.52 3.1 3.02 97.74
    Enbridge Energy Partners, L.P. EEP 6.15% 2.00% 8.15% BBB 2.60 10.50 -2.35 2.9 4.35 106.57
    Enterprise Products Partners L.P. EPD 3.65% 6.70% 10.35% BBB+ 1.20 9.70 0.65 1.6 6.05 67.62
    Energy Transfer Partners, L.P. ETP 6.59% 4.00% 10.59% BBB- 2.50 10.70 -0.11 2.3 4.11 81.30
    Kinder Morgan Energy Partners, L.P. KMP 6.68% 3.20% 9.88% BBB 1.20 10.00 -0.12 2.5 3.32 97.87
    Magellan Midstream Partners LP MMP 2.88% 9.00% 11.88% BBB+ 1.00 10.00 1.88 2.4 7.12 72.27
    NuStar Energy L.P. NS 6.73% 1.60% 8.33% BB+ 3.50 11.50 -3.17 3.1 4.77 107.88
    ONEOK Partners, L.P. OKS 5.15% 6.70% 11.85% BBB 1.40 10.50 1.35 2.1 5.35 89.22
    Plains All American Pipeline, L.P. PAA 4.27% 8.00% 12.27% BBB 1.10 10.00 2.27 1.8 5.73 86.01
    Williams Partners L.P. WPZ 6.76% 5.30% 12.06% BBB 2.50 11.00 1.06 2.2 4.24 97.00

    Average   5.30% 4.57% 9.87%         2.48

    Company Q2-14 Consensus Total Bonds DCF My Total Rtn Consensus Pr Impl Distrib
        Yield CAGR Return Ratings Accr RRRs - RRR Ratings CAGR / DCF
    Small Cap Midstream
    Blueknight Energy Partners, L.P. BKEP 5.84% 8.70% 14.54% none 4.00 13.50 1.04 3.3 7.66 67.53
    Genesis Energy LP GEL 3.94% 9.00% 12.94% BB- 3.00 11.80 1.14 2.2 7.86 78.85
    Holly Energy Partners L.P. HEP 5.94% 6.00% 11.94% BB- 1.20 11.20 0.74 3.1 5.26 89.43
    Oiltanking Partners, L.P. OILT 1.98% 9.20% 11.18% none 1.40 10.50 0.68 2.4 8.52 58.41
    Spectra Energy Partners, LP SEP 4.15% 6.40% 10.55% BB 1.50 10.50 0.05 3.1 6.35 83.65
    Sunoco Logistics Partners L.P. SXL 3.05% 9.00% 12.05% BBB- 1.00 10.00 2.05 2.6 6.95 63.33
    TC PipeLines, LP TCP 6.19% 2.70% 8.89% BBB- 1.00 10.00 -1.11 3.6 3.81 85.26
    Tesoro Logistics LP TLLP 3.28% 9.00% 12.28% BB- 2.00 10.00 2.28 1.8 6.72 85.51
    Transmontaigne Partners L.P. TLP 6.03% 2.80% 8.83% none 1.00 10.00 -1.17 1.9 3.97 70.59

    Average   4.49% 6.98% 11.47%         2.67

    Company Q2-14 Consensus Total Bonds DCF My Total Rtn Consensus Pr Impl Distrib
        Yield CAGR Return Ratings Accr RRRs - RRR Ratings CAGR / DCF
    Gathering & Processing
    Access Midstream Partners, L.P. ACMP 3.64% 9.60% 13.24% BB- 1.10 12.00 1.24 1.7 8.36 70.12
    American Midstream Partners, LP AMID 6.33% 6.30% 12.63% none 5.00 12.50 0.13 2.5 6.17 97.88
    Atlas Pipeline Partners, L.P. APL 7.03% 7.30% 14.33% B+ 5.00 13.50 0.83 1.8 6.47 91.85
    Crestwood Midstream Partners LP CMLP 7.01% 5.60% 12.61% BB 4.20 12.50 0.11 1.9 5.49 93.71
    DCP Midstream Partners LP DPM 5.20% 7.00% 12.20% BBB- 2.60 11.50 0.70 1.9 6.30 93.71
    EQT Midstream Partners, LP EQM 2.06% 9.60% 11.66% none 1.30 11.20 0.46 1.7 9.14 57.65
    Exterran Partners, L.P. EXLP 7.43% 3.00% 10.43% B 1.70 11.50 -1.07 2.6 4.07 78.75
    MarkWest Energy Partners, L.P. MWE 4.71% 7.60% 12.31% BB 2.70 12.50 -0.19 1.5 7.79 89.23
    Targa Resources Partners LP NGLS 4.36% 7.40% 11.76% BB 1.60 12.20 -0.44 2.3 7.84 77.02
    Regency Energy Partners LP RGP 6.00% 5.00% 11.00% BB 2.70 12.00 -1.00 2.8 6.00 93.66
    Western Gas Partners LP WES 3.18% 9.10% 12.28% BBB- 1.20 10.90 1.38 1.9 7.72 79.37
    EnLink Midstream Partners, LP ENLK 4.56% 8.70% 13.26% BBB 3.50 12.70 0.56 2.4 8.14 95.36

    Average   5.13% 7.18% 12.31%         2.08
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Comments (15)
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  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » sample question - "When you do your CAGR work, do make use of the CAGR online calculators and if so is there one you recommend over the others?"

     

    A good CAGR projection is only partially based on "history". But (1) historical distribution growth inertia is an input. (2) A three year earnings growth inertia based on the LTM earnings growth + 2014 projected growth + 2015 projected growth is an input. (3) The distribution to earnings/share ratio is an input. (4) For banks and BDCs, a good CAGR is closely aligned to LTM NAV or book growth. (5) A good CAGR produces a realistic "price implied" RRR projection - and a good RRR projection produces a good "price implied" CAGR projection. (6) A good CAGR projection uses the input of projections from other sources. In some sectors, the consensus CAGR from Yahoo is used - and in some sectors (like MLPs and BDCs) the Yahoo CAGRs are consistently bad. The David Fish CCC list includes his CAGR projection. Value Line produces CAGR projections. Most brokerages do their own CAGR projections. Network so you have access to multiple third party projections. It is my observation that there are lots of "brain farts" out there in the world of CAGR projections. You can not rely on a "single source". And borrowed projections can not be your only input for your CAGR projection. (7) Analyst ratings are "mostly right" - and a good CAGR produces a "yield + CAGR - RRR" number that is in alignment with the analyst ratings. (8) A good CAGR projection is in alignment with the stocks "growth story" that you derive from your own due diligence.

     

    And (9) the final test is your own portfolio. If you are investing with CAGR and RRR awareness and producing good assessments, then your portfolio is beating the market (or the sector ETF) in 50% to 80% of the sectors where you have diversified investments year after year. "Dividend growth investing" is a reasonably consistent market beating strategy.

     

    Proverbs 15:22 - Without consultation, plans are frustrated, but with many counselors they succeed.

     

    The investor who fails to use a wide source of metrics as his "many counselors" is failing to take advantage of the tools that are out there. Most investors spend their time chasing borrowed opinions - and that results in them trading too often, failing to be diversified, and significantly loosing to the market.

     

    Remember the voice of your mother. Remember when you said "But mom, everyone else is doing it" and she said "What if everyone was jumping off a bridge? Would you want to do that, too?" Well . . . . . when it comes to investing, there is the appearance that everyone else is jumping off a bridge.

     

    Build your own RRRs and CAGRs. You can borrow - but borrow from lots of inputs. You can delegate to others the creation of the metric spreadsheets - but read, understand and "implement" the lessons from those spreadsheets.

     

    In summation - On-line CAGR calculators do not use sufficient inputs to generate a good CAGR.
    19 Jul 2014, 11:05 AM Reply Like
  • bsfitzhugh
    , contributor
    Comments (42) | Send Message
     
    Always enjoy reading your updates and appreciate your novel approach. Just curious, how do you ensure market beating returns year after year? Do you systematically sell your winners when their "Total Return - RRR" goes negative and replace with others you believe to be undervalued? Any rule of thumb on when you pull the trigger on this sort of decision?
    19 Jul 2014, 09:37 PM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » bsfitzhugh wrote: How do you ensure market beating returns year after year?

     

    Holding a large allocation in growth MLPs has resulted in a portfolio that most often beats the market.

     

    Do you systematically sell your winners when their "Total Return - RRR" goes negative and replace with others you believe to be undervalued?

     

    I have a natural resistance to sell. The fact that I periodically post what I own helps my selling. I also have to disclose sector holdings in Seeking Alpha articles on a specific sector. I am sometimes embarrassed that I own a specific stock (CLX being the best current example - BWP being a past example).

     

    Any rule of thumb on when you pull the trigger on this sort of decision?

     

    I sometimes get over allocated to some stocks due to their success. This causes my portfolio weighted average yield to fall below its target. I like having the opportunity to sell some of something that has won and buying something that generates more yield.
    20 Jul 2014, 09:16 AM Reply Like
  • bsfitzhugh
    , contributor
    Comments (42) | Send Message
     
    Thanks Factoids,

     

    My impression is that multiple expansion for [growth] MLPs has trumped the need for CAGR awareness in that sector in recent times. In other words, I didn't expect you to credit your outperformance to sector allocation rather than the rigor of your valuation assessments. Was it your valuation assessment that led you to overweight to begin with?

     

    You have stated this is a sub-optimal time for MLP purchases. Do you feel holding a large allocation in growth MLPs will continue to beat the market (I presume S&P?) going forward?
    20 Jul 2014, 04:51 PM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » bsfitzhugh wrote that it is his impression "that multiple expansion for [growth] MLPs has trumped the need for CAGR awareness".

     

    I would strongly argue that CAGR awareness was at least partially needed to identify the growth MLPs.

     

    bsfitzhugh asked if it was my valuation assessments that led me to overweight (growth MLPs) to begin with? Yes.

     

    bsfitzhugh asked if I believed that holding a large allocation in growth MLPs in one's portfolio will continue to let such a portfolio beat the market (or the S&P500) going forward? Yes. Energy in general appears to me to be a major growth story in the American economy - and that should continue for several years. Good midstream stocks should benefit from that story while potentially having lower risk and higher yield.

     

    At the same time, it is all about sending molecule x to destination y (or in more technical terms - it's all about hub spreads). Some x's will no longer be needed at the y's. That could be why ETP had flat distribution growth for years. That is why BWP is in trouble. Such events will continue. So stay diversified. And keep up to date with your due diligence.
    20 Jul 2014, 10:53 PM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » sample question - How do you set your RRR assessments?

     

    My RRRs are closely rated to credit ratings. In the beginning of the assessment, BBB+ results in a 9.8% RRR. BBB results in a 10.2%. BBB- results in a 10.5%. Etc. Those rating are then adjusted up or down depending on historical DCF projection accuracy, debt to market caps, debt to EBITDAs, the RRR assessments from Wells Fargo and Morgan Stanley, and the price implied RRRs.

     

    A good RRR projection produces a good "price implied" CAGR projection. So I use my price implied CAGR numbers to "test" if the RRR assessments appears sufficiently accurate.

     

    Because there is brokerage supplied data that goes into the setting of RRRs - I never publicly show the spreadsheet that displays the RRR assessment process.

     

    19 Jul 2014, 11:14 AM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » sample question - Do small differences in the CAGR, RRR or "yield + CAGR - RRR" have any significance?

     

    No. These are all "fuzzy" numbers. And they are all 5 years forward projections.

     

    It is my goal to have a relatively low risk total portfolio. So I want to have a strong weighting in the lower RRR options in each sector where I invest. This is a goal that most investors would also want to reach. If there is one metric where fairly small numeric differences matter - it is with RRRs.

     

    I know that CAGR projections are volatile. CAGR projections are the fuzziest of these metrics. I would call a 7.7% CAGR, an 8.0% CAGR, and a 8.3% CAGR all being "eight-ish" - there is not a meaningful difference between the three projections. At the same time, I would say that there is a huge difference between a 5% CAGR and an 8% CAGR.

     

    If all stocks were fairly valued according to my metrics and this system, all stocks would have a "Yield + CAGR - RRR" that would be very close to zero. Any "Yield + CAGR - RRR" that has a value between -0.33 and +0.33 is roughly fairly valued.
    19 Jul 2014, 11:33 AM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » Actual question from a private message on Investor Village: "Instead of using the CAGR of the distribution, why don't you use the CAGR of the DCF/Unit?"

     

    Answer: Because there is less volatility in a distribution CAGR - so I have the perception that it is the metric best used to judge valuations.

     

    I already produce DCF projections for the next three years (2014, 2015 and 2016). The three year average growth rate is already a component in my MLP CAGR projection. I have seen for years the volatility in that number as . . . say . . . the trio of years used in that average growth rate rolls over from 14,15,16 to 15,16,17. There is already some volatility I the distribution CAGR projections due to the yearly roll-over - but it is less dramatic.

     

    It is also my perception that the analysts get more conservative in the DCF growth projections as earnings visibility decreases in the more distant years. That mutes the differences between the high and low growth companies. As an investor, I do not want to produce data output that mutes the differences between the two. I have access to DCF projections for 2017 (which I will start using in August of 2014), 2018 and 2019. But I lack much confidence in those projections.

     

    So my ability to produce a more future oriented DCF average growth rate metric is hampered by problems in the consensus analyst DCF numbers for the more distant out years.
    19 Jul 2014, 05:57 PM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » After providing the above reply, the person with the question wrote back - writing "I just feel that those MLPs actually retaining a large part of their DCF are under appreciated by the model. For example, if EPD continues to grow their DCF and DCF per unit, as they have over the last few quarters, I think they will be retaining over 50% of their DCF by early 2016...so they could easily step us their distribution to a CAGR of 10% sometime in 2015 if they wanted, especially now they are getting into these new exporting businesses. In my opinion, the lower RRR does not do justice to that......."

     

    He is not reading the spreadsheet like I am reading the spreadsheet. The "yield + CAGR - RRR" for EPD implies that EPD would be under valued as long as the yield is below 3%. The current yield is 3.65%. IMHO, that is a very aggressive valuation assessment. Aggressive or not, I think it is the correct assessment. I believe that the low RRR "does do justice" to the valuation assessment of EPD.
    19 Jul 2014, 08:02 PM Reply Like
  • jmpage1911
    , contributor
    Comments (28) | Send Message
     
    I'm confused, I thought the most under valued MLP would have the highest "yield + CAGR - RRR". If that is the case, wouldn't EPD be under valued as long as the yield is above 3% and not below?
    20 Jul 2014, 12:29 AM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » I should have written that "EPD would be under valued as long as the yield is ABOVE 3%".
    20 Jul 2014, 07:27 AM Reply Like
  • jmpage1911
    , contributor
    Comments (28) | Send Message
     
    Follow-up question - In your recent MLP GP article, the RRR's for the GP's are in a similar range as the underlying MLP's, but the CAGR is higher.

     

    For example, PAGP has an RRR of 9.5, but the Consensus CAGR is 18%. This means that the yield can approach zero and the "yield + CAGR - RRR" would still be positive which would indicate PAGP is undervalued. Is "yield + CAGR - RRR" valid for determining if MLP GP's are under/over valued? If not what is the best way to determine their fair value?
    20 Jul 2014, 10:00 AM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » jmpage1911 noted that the yield can approach zero (for the MLP GPs) and the "yield + CAGR - RRR" would still be positive - which would indicate almost any GP would be undervalued at a tiny yield.

     

    (1) I want my RRR assessments to be in line with those from Wells Fargo and Morgan Stanley. But they are not - they are already much higher. (2) I also know that I good RRR produces a realistic price implied CAGR. But that is not happening - my price implied CAGRs are way too low. Which would imply that my RRRs need to be much higher - about twice as high. (3) I also know that my GP CAGRs should be I alignment with "the historical median GP to MLP distribution growth multiple" times the MLP's growth multiple. But my conservative GP CAGRs are too low for that to be true.

     

    So it is the case that if I solve one problem (like raise the CAGRs), then another problem (the "yield + CAGR - RRR" numbers already being radically high) becomes radically worse. Or raise the RRRs high enough to make the "yield + CAGR - RRR" numbers to approach a number close to zero, and my RRRs become way out of alignment with RRR numbers from the brokerage analysts.

     

    Whatever the "right solution" is . . . it would point to the conclusion that GPs are significantly under valued. Unit price appreciation in the GPs over the last several years has justified that such a conclusion would have been historically accurate. I still believe that the conclusion is currently accurate.

     

    There is one big caveat - as MLP distribution growth approaches zero, the yield difference between the GP and the MLP should also approach zero as the GPs distribution growth also approaches zero. (You may need to read that last sentence twice - its really important.) That event "could" happen one day. And that implies that my current RRRs for the GPs are way too low. Or put in different words, my GP RRRs are way too low to account for a risk event that is highly unlikely in the here and now - but becomes more possible ten to twenty years from now.

     

    I have written a lot without directly answering the question "what is the best way to determine (the GPs) fair value? I do not have a good answer for that. This is one of the tough questions that I was fearing someone would ask.
    20 Jul 2014, 08:38 PM Reply Like
  • MLP Trader
    , contributor
    Comments (1062) | Send Message
     
    I think it's a shame that this appears only on the instablog. It seems like you should at least be getting a penny a hit for this extensive work. IMO, it is the single most useful thing on Seeking Alpha to date.
    19 Jul 2014, 06:52 PM Reply Like
  • Factoids
    , contributor
    Comments (1152) | Send Message
     
    Author’s reply » Thanks "MLP Trader" for you kind valuation assessment of my work (grin).

     

    It is my perception that there is not a wide audience for articles that have strongly "numbers based" content. Most folks just want other folks to tell them what to buy. The numbers only get in their way. I strongly believe that the numbers will tell you what to buy. I want to get out of the way of the numbers - and format the numbers in meaningful spreadsheets that let the numbers tell their story.

     

    I also anticipated tougher questions - along with some dumb questions. After I posted info on CAGRs on "another message board" - someone posted "what are CAGRs and RRRs?" I was tempted to reply that "They are the keys to the universe". I will let the task of replying to that question fall to someone else. I am probably incapable of generating an unbiased response.
    19 Jul 2014, 08:36 PM Reply Like
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