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Bigger they are...?

Apr. 06, 2011 11:32 PM ETEPD, HEP, PNG, KMP
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Hinds Howard's Blog
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Growth At A Reasonable Price, Dividend Investing

Seeking Alpha Analyst Since 2009

I serve as Portfolio Manager on the Listed Infrastructure Team at CBRE Clarion Securities, a global asset management firm based in Radnor, PA. My primary focus is on investing in Midstream companies, including Master Limited Partnerships (MLPs), as well as transportation companies (rails, airports) for larger infrastructure investment team.

When the market cratered for a few days last month and it seemed like the end of days came a year early, it was interesting to see EPD (on no news) trade off significantly more than the smaller and less liquid MLPs.  There was even a few minutes when stink bids were getting hit for EPD at $10 below the previous trade.  I didn’t see any of that from the smaller MLPs, which was curious.

EPD is the largest and most active MLP of them all, with a market cap of more than $35 billion and average daily liquidity of around $63mm.  Compare that to the most thinly traded midstream MLP, which is either HEP on number of shares (just 33,700 a day) or PNG on daily trading value (approximately $1.3mm).  So, EPD trades around 48 times as many shares and around 47 times as much value on a daily basis than the most thinly traded names.

Because of its liquidity, EPD can be owned by a much larger universe of institutions than PNG or HEP; it’s much easier to build a position of size in EPD.  I’m not sure where I read or heard this, but for some reason I had it in my head that larger MLPs with more liquidity tended to outperform in periods of high volatility.  This myth may have been a direct result of the 2008 performance of EPD’s nemesis KMP, which was down only 15% (only 8% including the distributions).

In the chart below I compare how the top 10 most active midstream MLPs fared in from peak to trough last month compared with the least active midstream MLPs.  Additionally, I was curious how those same MLPs did in 2008.  In the shorter time period, for the most part, the active names performed on par or slightly worse than the more thinly traded ones.  Back in 2008, however, KMP was more the exception than the rule it appears.

I guess the argument could be made that the most liquid MLPs are the easiest to sell in a down turn...not sure any of this proves anything, but it intrigued me.
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