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Ted
Copy & Paste Barron's Dimitra Defotis
Investors packed the Metropolitan Club in Manhattan Thursday to hear from experts on master limited partnerships. After a decade of beating the stock market, MLPs—which are mostly energy infrastructure companies—lagged in 2012 and produced a total return of about 28% last year, just behind the broader market. Investors prize them for their juicy, tax-advantaged yields, but valuations are getting a bit rich, as noted in Barron's latest MLP roundtable.
Still, investors continue to flock to new MLPs and MLP funds. One big reason: an average payout of about 6%. Plus, they offer exposure to the boom in North American oil-and-gas production, and with billions in planned infrastructure spending over the next decade, the best players should continue to do well.
Against that backdrop, Barron's asked two money managers presenting at Capital Link's Master Limited Partnership Investing Forum for their top MLP picks now. Two themes emerged: first, the desirability of crude oil and natural gas liquids, over natural gas; second, the importance of diversity, geographic and otherwise.
Opening the festivities at the club was Kyri Loupis, head of energy and infrastructure at Goldman Sachs Asset Management, who manages MLP portfolios and two publicly traded funds. He likes smaller MLPs with strong growth prospects, healthy balance sheets and small distribution obligations to general partners. His picks:
• Oiltanking Partners (ticker: OILT): $2.9 billion market value. It is in the crude-oil logistics business. With major crude-oil delivery bottlenecks, Oiltanking's positions in the Houston ship channel are valuable. Its yield, at 2.7%, is less than half the MLP average, but Loupis expects distribution growth of 18% annually over three years, and its distribution coverage ratio—the partnership's cash flow after maintenance capital spending and general-partner payments, divided by current distributions—is very strong at 1.9 times. A number above 1 is considered healthy. Debt, at 1.3 times earnings before interest, taxes, depreciation and amortization, is about one-third that of other MLPs.
• Lehigh Gas Partners (LGP): $404 million market value; 7.5% yield. It owns and leases real estate tied to retail fuel distribution at 700 locations in the Northeast, Florida and Ohio. Loupis expects distribution growth of 8% annually over the next three years as Lehigh expands its wholesale distribution network. The coverage ratio is 1.46 times, and a low percentage of total distributions goes to the general partner. It is still undiscovered, and not part of the benchmark Alerian MLP index.
• EQT Midstream Partners (EQM): $3.1 billion market value; 2.8% yield. It is focused on natural gas gathering, transmission and storage, mostly in the Appalachian basin. It was carved in 2012 from parent EQT (EQT). Loupis believes that the parent company could—and should—sell pipelines and other midstream assets to the MLP, which would unlock more value in the limited partner. Loupis projects distribution growth of 15% to 20% or more annually over the next three years, supporting yield growth.
One interesting note: Loupis does not hold any Kinder Morgan businesses in his two funds. The four companies in the Kinder empire— Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR), Kinder Morgan Inc. (KMI) and El Paso Pipeline Partners (EPB)—were the subject of a recent Barron's cover story. Barron's wrote that Kinder Morgan makes aggressive assumptions in its accounting. (See "Kinder Morgan: Trouble in the Pipelines," Feb. 22.)
Dan Spears, a portfolio manager at Swank Capital, a Dallas-based asset manager with an MLP focus, still likes large pipeline players (including some Kinder-related stocks). His top picks:
• Access Midstream Partners (ACMP): $10.8 billion market value; 3.9% yield. It owns gas gathering and processing assets and has leadership positions in some less-developed fields with growing production. Spears expects distribution growth of 15% to 20% per year. Distribution coverage is strong at about 1.5 times. It has budgeted $3.5 billion for capital spending between 2013 and 2015, which should boost volumes and expand desirable fixed-fee contracts.
• Energy Transfer Equity (ETE): $25 billion market value; 3.1% yield. It is a leading natural gas pipeline operator. But acquisitions of natural gas liquids (NGL) and crude logistics businesses have diversified its operations. There is strong demand for gas liquids, which contain propane, from industrial and retail customers. Spears thinks ETE's price should rise at least 20% to reflect the value of these businesses. Distribution growth looks steady.
• NGL Energy Partners (NGL): $3 billion market value; 5.9% yield. Acquisitions have diversified the business, and were accomplished at good prices since NGL's public offering in 2011. It is in the crude oil, propane and water service business, but is not well covered by analysts. Spears thinks there are growth opportunities in dealing with wastewater and providing water used in drilling. Good distribution growth and distribution coverage.
How long can the MLP profits keep flowing? A skeptic in the audience, apparently fatigued with industry bullishness, asked Spears a sobering question: Who is not positioned well in the energy space? Spears named three areas: Broadly, Europe loses because it doesn't have cheap natural gas as a feedstock to compete in refining and manufacturing. In the U.S., natural gas producers will see low prices for a while. And some long-distance pipelines face obsolescence, unable to match supply with demand.
"Expectations need to come down a little bit for MLP returns from last year. We expect total returns of between 8% and 12% in 2014," Spears told Barrons.com. "But MLPs are not necessarily expensive if you look at their investing and growth prospects."
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Comments
For an interesting discussion on the relative merits of Barron's relevance these days you might want to check out this recent M* Fidelity Investments discussion thread:
http://socialize.morningstar.com/NewSocialize/forums/p/336253/3521670.aspx#3521670
Regards,
Ted