CS Take on MLPs
Weekly Analysis
Not All MLPs Are a Toll Road
22 pages, 37 exhibits
Download Link: sendspace.com
Not All MLPs Are a Toll Road: The sharp $16.75/Bbl (15%) drop in crude
oil prices and weak energy tape impacted MLP performance last week, in
our view. Although the preponderance of MLP cash flow is generated from
fee based revenues, a portion may be derived from commodity based
activities (such as gas processing). So it is important for investors to
recognize the risk spectrum of activities that MLPs engage in and that not all
MLPs are toll roads. This may help to explain why MLP stock performance
may begin to correlate more closely to commodity prices.
Our Take: MLPs historically have done a good job investing capital and
generating returns that support distribution growth. This new midstream
investment cycle should support distribution growth around 5% plus and this
coupled with average yields of about 6% should equate to total returns of
10% plus, in our view. Our top picks include EPD, ETE and PAA among
large caps and DPM and NGLS among small caps.
Themes Emerging from 1Q11 Earnings Calls: 1) Natural gas liquids
(NGLs) fundamentals remain strong. Last year’s concern that a supply glut
of NGLs, specifically ethane, may be on the horizon has dissipated as
petrochemical demand is outstripping supply. 2) Infrastructure spending is
on the rise, especially around liquids rich plays. 3) Companies are
scrambling to find solutions to move crude oil south from Cushing,
Oklahoma and from the Eagle Ford in south Texas to refineries along the
Gulf Coast. 4) Natural gas fundamentals remain weak – collapse of basis
differentials and weak gas storage fundamentals. 5) Distribution growth is
accelerating as MLPs reap rewards from completed projects/acquisitions
and benefit from the uplift in NGL fundamentals. See page 3.
Initiated Coverage of NGLS (Outperform) and TRGP (Neutral): Our 12-
month target prices for NGLS and TRGP are $40 and $34, respectively,
implying total return potential of 27% and 4%. As of last night’s close, NGLS
offered a current yield of 6.7%, at the high end of its peers, and attractive
distribution growth potential (8.3% three-year CAGR). TRGP owns the
general partner (GP) of NGLS and is a leveraged way to invest in NGLS’s
growth. TRGP’s dividend is poised for rapid growth (19.3% 3-year CAGR);
however, we think this growth is reflected in the current price, as evidenced
by its 3.2% yield, lowest amongst its GP peers. For more, please see Targa
Resources - Opportunity Rich NGL Play
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OT:
FUNDamental Insights
CEF Highlights
9 May 2011 ¦ 28 pages
citigroupgeo.com
In this report, we aim to provide investors with a regular update and our latest views
of the closed-end fund (CEF) sector |
