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Strategies & Market Trends : Value Investing

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Mattyice

To: Spekulatius who wrote (53641)	3/23/2014 1:14:25 PM
From: E_K_S	1 Recommendation of 78748

Hi Spekulatius - Several of these GP's do acquire and/or develop producing assets that they eventually "drop-down" to their operating MLP(s). Some of these GP/MLP structures are new and from my observations experience a different growth history. The GP usually can grow faster as evidenced by the recent restructuring of WMB and WPZ (and the spin off of WPX). My $15.00/share investment in WMB (before the company restructure) is worth over $40.00/share (after their restructure) and the market continues to price in a higher growth factor for the GP WMB than their newly created WPZ mlp. I suspect as these entities mature (GP vs MLP) the "growth" component may/could be in the MLP component(s), I am not sure that is always the case. Perhaps it may have something to do with the total MLP units that the GP owns, the special contract incentives provided to the GP and/or even the new business opportunities that the GP pursues resulting in another "drop-down" to one or more of their MLP's. KMI did this when they purchased El Paseo Electric pipelines and created EPB. I know because I owned a large chunk of EP in 2002 and was acquired by KMI in cash, KMI stock and EPB units. KMI at least during that period was acquiring assets growing their operation(s) with the market pricing in a higher growth rate than their KMP mlp. I am looking at an investment in CVR Energy, Inc. (CVI) primarily because they own 70% of CVR Partners, LP (UAN). UAN is up over 37% from December 2013 while CVR is up only 13%. Also, Carl Ichan has been rumored to pay another "special" dividend as he is the main beneficiary owning 82% of CVI. It's also his 2nd largest holding in his portfolio. I always prefer to own the GP over the MLP but trying to find where the value proposition lies can be challenging. As the midstream market grows, I am always trying to figure out where the next undervalued investment resides. Bruwin's suggestion at looking at debt levels is a good first start but from my experience there are so many other factors that seem to affect valuation. Specifically it's the future cash flows of these MLP's that is the main factor I see. One small mis-calculation by management and/or re-statement of those cash flows can "blow-up" the MLP as evidenced by the recent BWP announcement. FWIW, I still believe there are a lot of opportunities in the Midstream gathering sector. I am not sure how higher interest rates by the Fed will affect future growth but it could be a net positive. Selling MLP units to raise capital could provide more liquidity that if similar amounts were done through the bond market directly bu the GP. Also, the current tax advantages of the MLP structure is a net positive too. The RGP and PVR merger closed Friday and the new combined entity Regency Energy Partners LP (RGP) -NYSE closed at a new 52 week high. I own both companies and expect the combined entity to move even higher. The per unit debt/FCF (from the combined group) is less. I expect the market to eventually price this one higher as they gain efficiencies from the mergers in reduced operating costs. EKS

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