Cautious Short Term Outlook for MLPs

Includes: AMJ, AMLP, EEP, EPD, EPE
by: Avi Morris

MLPs held up fairly well when the markets sold off in August. September, statistically the worst month for stocks, has had solid gains for stocks. The Dow is up 8% while the Alerian MLP Index only gained 4.4% to 332 with a 6.6% yield. However, YTD the MLP index (AMZ) has an impressive gain, up 16%. AMZX, the comparable index including reinvested income, is up 23% YTD to new record levels (an estimate is used for Sep 24 because Alerian has not been updated the MLP index spreadsheet after September 17).


Dec 31, 2009...285....755
Mar 31, 2010...303....817
Jun 30, 2010...308....844
Sep 24, 2010...332....925 (est)

YTD________+16%_+23% (est)

The biggest development for MLPs this year is the 2 major oil spills by Enbridge Energy (NYSE:EEP). The 2nd one (this month in Illinois) was cleaned up quickly and reopened one week later. The first leak (2 months ago in Michigan) was just given permission by federal authorities to reopen on September 26. There was also a minor one 4 days after the Illinois spill. EEP closed its 70K barrel-per-day IBPD) pipeline running between Westover Ontario and New York state. A small leak was investigated and quickly restarted after it was determined to be leak-free. In addition, EEP has had 5 other leaks in this decade prior to these. At the November 2007 pipeline fire in Minnesota, 2 employees were killed. EEP has handled these problems well.

Other MLPs have also had problems with their pipelines and other properties, but there have been no catastrophes. MLP investors should understand that working with energy products is dangerous. While catastrophes are remote, Exxon (NYSE:XOM) and BP (NYSE:BP) have reminded everybody about that danger.

EEP is moving forward with the Bakken Expansion Program to provide 145K BPD pipeline capacity from new Bakken and Three Forks formation in North Dakota to interconnect with other existing affiliated systems serving refineries in North America.

The other recent major development for MLPs is combining limited partnerships with the general partnerships. Limited partners typically provide the bulk of financing while general partners run the business. 3 weeks ago Enterprise Products Partners (NYSE:EPD), the largest MLP, made an offer to buy Enterprise GP Holdings (EPE), its general partner, at a 12% premium. The purpose is to reduce cost of capital and simplify organizational structure (i.e. cost savings). Limited and general partners split profits based on incentives for general partners at high levels of profits. These splits are not discussed much because it can be difficult for some investors to understand. Other MLPs are following the lead to combine their 2 operations.

MLPs have had an extraordinary performance since the end of 2008. The index has virtually doubled from its 176 value on December 31, 2008. This year the index rose 60 in 2 months from its May lows but has had a flat performance in the last 2 months. The 343 record is just 11 points away. I remain cautious over the short term after such a rapid rise. Low rates, i.e on Treasuries, are helping drive up demand for MLPs. That can't last long term.

Disclosure: No positions

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