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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Spekulatius who wrote (55530)	6/27/2015 4:33:57 PM
From: Graham Osborn	Read Replies (3) \| Respond to of 78702

It’s a good thing I have nothing better to do today, as SI seems to be chewing up and swallowing my efforts.. argh!! The MLPs strike me as a bit of a rollup, similar to the MBSs. The GPs needed capital to buy high-priced assets during the boom, so they made the pitch to retail investors that a midstream asset base spinoff would generate cash flows sufficient to cover growing distributions (and ultimately acquisitions and delevering too). Since the contracts were long term, the assets core and the commodity risk largely eliminated, you could hold until death with minimal risk of impairment or distribution cuts. Investors would have done well to evaluate them as junk bonds (in which case the coverage ratios would be rejected) or equities (in which case the distribution policy/ IDRs would have been recognized as value destructive and the tax structure suboptimal for a short to medium holding period). Take WPZ: Cash/ Cap: 0.0094 D/ E: 0.55 P/ TB: 2.0 EV/ Rev: 17 EV/ EBITDA: 33 EV/ FCF: -534 ROE: 6% They've been free cash flow negative the past 5 years: So distributable cash flows are negative, with 300M cash and 17B LT debt. Distributions have exceeded net income the past 4 years. So at least part of distributions are being paid out of the financing pool. That's what I find highly misleading. The MLP was structured as a quasi fixed-income instrument with very low coverage ratio that was never sustainable, and now old capital is being returned with new. Which means if WPZ weren’t integrated, it would have to have to cut its distribution with significant loss of principal a la Eagle Rock. But if they do integrate, investors are hardly getting a strategic premium after tax since the GP still controls the assets. Reducing their cost of capital is jargon for reducing payouts IMO (to pay down debt of course). Seems like a bit of a I win/ you lose scenario. OKE seems in the same camp with around 250M cash, 9B LT debt and negative free cash flow the past 3 years. Why do you expect crude price recovery will help? If pipelines benefit from surplus, that already exists. - Graham