Re: MLP's and QE
The two major factors that affect MLP's are (1) distribution coverage and (2) Growth. I suggest you look at mlpdata.com specifically (1) "Yield to CAGR" and (2) "Yield to Coverage".
The Fed's sustained QE has made the cost of capital at historical low levels. This is/was supposed to stimulate investment in several ways but has also distorted the normal flow of capital. The basic market pricing model for MLP's is their distribution yield to their unit holders. In order to generate these growing FCF's, MLP's must invest huge amount of capital into future projects. That's good as long as the cost of capital is low. Marginal projects become sour when the cost of capital increases and suddenly distributions must be cut and/or more MLP units must be sold (dilution) to pay down debt.
As long as your "Yield to Coverage" is above 1x, distributions s/d be safe but future growth in distributions may slow down (this effects current and future MLP price). Therefore, you want to look at the Yield to CAGR specifically the 3 year chart.
The links above provide you a graphical view of most all MLP's and where they stand in this battle for yield, coverage and growth. When you run you mouse over the red dots, you get the current status of these variables.
As QE begins to tapper, then stopped and the real interest rates begins to move higher, BOTH MLP growth should fall, distribution yield should fall and MLP market prices should fall. The question is by how much and which ones will be impacted the most. It all about debt and how much leverage they use in building out their operation(s). On top of that, MLP's that are commodity driven could be impacted even more as changes in commodity prices must be factored into their pricing model.
My bet is the FED will take their time and move slowly as they begin to normalize interest rates. The marginal MLP's will drop in price first and may be merger and/or acquisition targets for the larger and more financially stable (less leverage) operators. Some MLP's will even go BK.
The key is to own operators with good solid assets, that are located in growth areas, have a real estate footprint that connects to prime distribution channels and have future expansion projects that can be completed with JV partners w/o significant use of debt (and/or leverage).
In the mean time, the MLP investor is obtaining a historical high rate of return (when compared to the "real" interest rate). For me that is the value proposition. This will end when interest rates normalize, so be sure to scale back your exposure by owing only the highest quality (and most liquid) operators as the FED normalizes rates. I expect this to take several years (5-7 years) so there s/d be plenty of time to manage your MLP basket accordingly.
EKS |
