re MLPs: Feature article Barron's today by D. Defotis interviewing two MLP pro's:
Several MLPs mentioned/recommended that I've not heard of (e.g. ACMP, GEL, WES, OILT)
Some I want to follow up on:
"Oneok Partners [OKS]. It operates pipelines that gather, process, and transport natural-gas liquids. It could grow distributions 13% in 2013 and 2014. Its 4.7% yield is lower than the sector average, but this is one of the best organic-growth stories. It has $7 billion in projects that should help generate a 17% total return over 12 months."
...
"Logistics MLPs transport oil and gas liquids via pipelines, rails, trucks, and ships. Which do you like?
Loupis: MarkWest Energy Partners [MWE] is on the natural-gas-liquids side. Genesis Energy [GEL] is one of the few crude-oil logistics pure plays. They have assets in Texas, Florida, and the Gulf of Mexico. It trades at a 4.4% yield, and we expect it will grow distributions by 10% each year over the next three years."
...
"Eades: Oiltanking Partners [OILT] is my "geography matters" pick. Where assets are located is extremely important in determining an MLP's growth prospects. They own two primary assets, one in the Houston Ship Channel, and one in Beaumont, Texas, and they own storage assets. Nothing sexy, [but] they are completely fee-based assets. As we see more and more barrels moving from the Bakken, from the Rockies, from the Permian Basin, from Canada, to the Gulf Coast, this company is extremely well positioned to deliver growth in storage capacity along the Gulf Coast. The yield is lower than the average MLP company, but they have an above-average distribution-growth profile. They'll grow the distribution by 13% in 2013, and another 13% to 15% in 2015. Total return over the next year could be 16%."
Several others too.
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Here's how Mr. Eades says he looks at mlps: ("Chris Eades, 43, for his considerable experience as an MLP analyst, and because he co-manages about $4 billion across three ClearBridge Investments closed-end MLP funds")
"MLPs are equities, but you use different methods to value them?
Eades: Price/earnings ratios are not relevant because an MLP's ability to depreciate its assets reduces its reported earnings. Ebitda [earnings before interest, taxes, depreciation, and amortization] is useful, but the enterprise-value-to-Ebitda multiple reflects unlevered cash flow, and MLPs finance much of their growth from issuing debt. We look at distributable cash flow, which is Ebitda minus interest expenses, capital spending, and after the general partner is paid."
What other metrics do you look at?
Eades: The distribution coverage ratio -- which is the distributable cash flow an MLP generates divided by the cash flow it distributes to investors. Anything greater than 1.0 means the MLP has cash flow in excess of what it is paying investors. It shows how much cushion the MLP has.
That's all well and good, but most investors are interested in MLPs for their yield.
Eades: Yes, most MLP investors are maniacally focused on yield, yield, yield as the only valuation metric. But they should also consider the yield's growth. The total return of an MLP is the yield plus the growth rate of that yield over time. In the past three years, stocks in the Alerian MLP Index that grew distributions up to 3% annually generated an annualized total return of 8.5%. Those that grew distributions by more than 10% every year generated a 27.7% annualized return. Yield by itself? Not so interesting." |
