Outlook for MLPs Ahead of April Earnings

Includes: FMO, KMP
by: Avi Morris

MLPs are one of the very few winning groups in 2009 (for those long in the markets). After beginning the year at 172, the Alerian MLP Index at 177 is still up. While MLPs have gained as the Dow was dropping over 20% YTD, selling sentiment has been affecting MLPs recently. In just the last two weeks, market averages sold off over 10% reaching 12 year lows. Two weeks ago the Dow crashed through the important 8000 floor which had held for four months. On March 2, the Dow plunged through 7000. This round of selling reached MLPs; they followed along as the Dow dropped and the index was aggravated by a 12 point drop on March 2. The largest new factor affecting financial markets, among many disasters in the credit crisis, has been the actual and proposed macro economic government spending programs coming from DC.

The US government is reorganizing itself around the concept that big government needs to get more involved by spending considerably more money to solve problems. However, markets have been rejecting this concept in the last two weeks. High yielding securities have been punished severely in the financial confusion. REITs have sold off badly in the last six months assuming the recession will bite them hard, sinking to new lows in recent days. Junk bond funds, after a nice bounce from overly depressed levels late last year, sold off on increased worries about more bond defaults. MLPs joined this decline for reasons which are not completely clear. They are high yield securities and that association must have contributed to their recent decline.

There are also increased worries about how the economic slowdown will hurt them. In April, MLPs will announce Q2 earnings, give guidance and set the distributions for Q2. Q1 distributions went well, with only a few reductions. If the recession bites their businesses harder, there may be more cuts in Q2. The desire to conserve cash is affecting more companies this year. Kinder Morgan (NYSE:KMP), the largest MLP with the strongest finances, increased their distribution to a $4.20 annual rate in Q1. However, their guidance said they expect the distribution for 2009 will be $4.20, indicating no further increases. That sounds like a subtle hint that they are expecting to feel the effects of slowing economic growth as their capital expenditures bring new pipelines on stream throughout the year.

All dividends are suspect and the highest yield securities are considered to have the greatest uncertainty, much more so than in the past. If financial markets keep falling, MLPs could also get dragged down (as seen in the March 2 decline) with other high yield securities. Their long term prospects remain excellent as the country's desire to build infrastructure for moving oil and gas around the country has not changed. However, bumps in the road immediately ahead will try even the most loyal fans of MLPs.

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