elliot_mllr

MLPs Entering 2009: High Yields Carry High Levels of Risk

I have several thoughts about the article and some of the interesting comments by other readers.
First, as to MLPs, in addition to Linn Energy (which actually is not an MLP but rather is an LLC, with no general partner to collect incentive distribution rights and with all members entitled to vote on company matters), Energy Transfer Partners (ETP) is also worth reviewing. I own a significant amount of ETP, as well as a little Linn (although I will buy more Linn, hopefully at a lower price). ETP pays an annual dividend of $3.58 and the units yield about 10.5% (although it has traded as low as $26 and I was too foolishly nervous to increase my position at that low a price and high a yield). In the third quarter ETP earned enough to increase the distribution as it normally would have, but given the extraordinary economic times it decided to retain the extra cash. As to credit availability it just closed a $600 million note issue (albeit at a 9.6% interest rate) to refinance lines of credit and for general company purposes. Its business seems strong and the dividend appears to be safe.
Some readers have commented about Canadian Energy Trusts, which I have owned, including most of those mentioned. My favorite of all is Crescent Point (CPG.UN on the TSX). For one thing, its management is superb and shareholder-friendly. It has a three year hedging policy which has enabled it to retain its relatively recently enhanced 0.23 cent monthly distribution, giving it a yield of over 12%. It is heavily into the Bakken play of the Williston Basin in Saskatchewan and has very little production in the heavy royalty province of Alberta. Bakken is light and sweet, and it (and CPC.UN) were the subject of favorable articles in a supplement to the December issue of the Oil & Gas Investor magazine. It has large tax pools which may probably enable it to keep up the dividend after the trust becomes a taxable entity. The only problem is that the Canadian dollar has recently sunk vs. the US dollar so the unit holder gets less of the distribution each month. At the current exchange rate the yield for a US holder is reduced from over 12% to just 10% and on a cash flow basis it's about 8.5% after the 15% Canadian tax is withheld.
I also have owned the shipping stocks which have been referred to. I believe that in 2009 the credit markets will open for trade letters of credit and the Brazilian-Chinese steel disputes will be resolved, both of which will be good for dry bulkers, as will the fact that at least 30% of the newbuild orderbook will not be completed. One of the more interesting dry bulkers is the newly public Safe Bulkers (SB), whose dividend yiield is about 40% but seems safe for this year at least. However, it has newbuilds coming on stream in 2010 which will have to be paid for. The safest shipping company stock is Sea Span, a container charterer, which has 35 ships on the water with an average remaining term of 7 years and the closest charter termination 5 years away. These charters are priced very inexpensively (about 25% below the market of six months ago), so when they are up for renewal there won't be calamitous repricing. Its fleet is new and modern. Its 33 ships under construction are all chartered for 11 or 12 years from delivery. All of its charter parties are solid lines. Two are Chinese state controlled, and Maersk and Happag-Lloyd have been around for 100 years each, through the Great Depression and two world wars. While it will need $900 million to pay for its newbuilds in 1010 and 2011, Sea Span has said that it won't issue dilutive equity for two years but will explore other alternatives, such as using as collateral for debt 15 currently unencumbered vessels, joint ventures, sales-leasebacks and financing from company insiders on a basis which preserves the dividend. Moreover, like MLPs and like Linn, most of Sea Span's distributions of $1.90 annualy are returns of capital. The yield at about $8 is approximately 22%.
All of these carry risk, but at least you are being paid to incur it.

Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

Bear in mind two cautionary points: MLPs cannot be owned in tax-deferred accounts but only in currently taxable accounts; and most MLPs (but not LLCs) have general partners which skim off Incentive Distribution Rights and reduce the share of the limited partners' cash flow.