Flash Alert: Mastering MLPs
In last week’s issue of The Energy Strategist, Taking Stock of 2007, I covered the Portfolio returns for last year as well as some of the key calls and investing themes, both good and not so good.
One sector I didn’t mention was the publicly traded partnerships (PTP); most of the partnerships recommended in TES are organized as master limited partnerships (MLP).
There are a total of 11 recommended PTPs in the TES portfolios at this time. Newer subscribers unfamiliar with the group should check out the Nov. 22, 2006, issue, Leading Income, and the more recent Oct. 3, 2007, issue The Partnerships, which lists all 11 PTPs, for a more detailed look at the group
On average, my recommended partnerships have held up reasonably well over the past year, rising about 4.5 percent through the end of last week. And the MLPs I’ve held for longer periods of time—such as Enterprise Product Partners (NYSE: EPD)—have performed exceptionally well for us. Enterprise is up 41 percent since I recommended it back in 2005, equivalent to an annualized gain of 14.2 percent.
But since midsummer, the MLPs have hit a rough patch, and some of my recommended MLP holdings have been hit hard. This isn’t at all unprecedented; we saw a similar pullback in the group back in 2005. That pullback served as an outstanding buying opportunity, and I also believe this one will.
The key point to keep in mind is that this selloff appears to be generally sectorwide, not company specific. I outlined some of the big-picture concerns in the Oct. 3 issue.
In addition, the worst-hit subgroup of the MLPs is the exploration and production (E&P) names. I believe the main problem here is that these companies used private placement deals to finance acquisitions. That left a large overhang of unregistered shares with which to contend.
But these headwinds are abating. Most of the unregistered share overhang is now registered and trading.
Also, we’re gradually working through a hefty backlog of MLP initial public offerings (IPO); investors have been selling down existing MLP holdings to buy into new IPOs. This IPO glut is exactly what irked the group back in 2005.
Over the past two weeks, two MLPs—Teekay LNG Partners (NYSE: TGP) and Eagle Rock Energy Partners (NSDQ: EROC)—touched my recommended stops. Including dividend income, Teekay was stopped out for a gain of about 11 percent from my initial recommendation and Eagle Rock was stopped for a loss around 12 percent.
Whenever one of my stops is hit, I like to take a short “cooling off” period to re-evaluate my positions in the stocks. In this case, I’m not fundamentally concerned about Teekay LNG. The company has long-term contracts covering all its LNG tanker ships; it doesn’t have any meaningful exposure to commodity prices or LNG tanker demand.
Teekay currently pays 53 cents per quarter, equivalent to a yield of about 6.8 percent. Based on consensus expectations and my own evaluation of growth prospects, that payout should climb to about $2.26 annualized in 2008 and $2.55 or so in 2009. This represents annualized growth of about 10 percent. I’m adding Teekay LNG back to the Proven Reserves Portfolio with a recommended stop at 21.95.
Eagle Rock is a riskier play, which is why it’s in the Wildcatters Portfolio instead of the Proven Reserves. The partnership now operates two different businesses: E&P and midstream assets. The E&P assets consist of about 157 mature, producing oil and gas wells; the midstream business includes pipelines and processing facilities.
As noted earlier, the E&P MLPs have been the most pressured subgroup, and Eagle Rock hasn’t been immune to that. In addition, trading only 45,000 shares per day on average, it doesn’t take much selling pressure to hit the stock.
Nonetheless, there are myriad opportunities to expand in both the midstream and E&P business. And Eagle Rock should be able to boost its distributions by around 10 to 15 percent annually over the next few years. Yielding 8.2 percent based on projected 2008 distributions, Eagle Rock is added back to the Wildcatters Portfolio with a new stop of 14.25.
One sector I didn’t mention was the publicly traded partnerships (PTP); most of the partnerships recommended in TES are organized as master limited partnerships (MLP).
There are a total of 11 recommended PTPs in the TES portfolios at this time. Newer subscribers unfamiliar with the group should check out the Nov. 22, 2006, issue, Leading Income, and the more recent Oct. 3, 2007, issue The Partnerships, which lists all 11 PTPs, for a more detailed look at the group
On average, my recommended partnerships have held up reasonably well over the past year, rising about 4.5 percent through the end of last week. And the MLPs I’ve held for longer periods of time—such as Enterprise Product Partners (NYSE: EPD)—have performed exceptionally well for us. Enterprise is up 41 percent since I recommended it back in 2005, equivalent to an annualized gain of 14.2 percent.
But since midsummer, the MLPs have hit a rough patch, and some of my recommended MLP holdings have been hit hard. This isn’t at all unprecedented; we saw a similar pullback in the group back in 2005. That pullback served as an outstanding buying opportunity, and I also believe this one will.
The key point to keep in mind is that this selloff appears to be generally sectorwide, not company specific. I outlined some of the big-picture concerns in the Oct. 3 issue.
In addition, the worst-hit subgroup of the MLPs is the exploration and production (E&P) names. I believe the main problem here is that these companies used private placement deals to finance acquisitions. That left a large overhang of unregistered shares with which to contend.
But these headwinds are abating. Most of the unregistered share overhang is now registered and trading.
Also, we’re gradually working through a hefty backlog of MLP initial public offerings (IPO); investors have been selling down existing MLP holdings to buy into new IPOs. This IPO glut is exactly what irked the group back in 2005.
Over the past two weeks, two MLPs—Teekay LNG Partners (NYSE: TGP) and Eagle Rock Energy Partners (NSDQ: EROC)—touched my recommended stops. Including dividend income, Teekay was stopped out for a gain of about 11 percent from my initial recommendation and Eagle Rock was stopped for a loss around 12 percent.
Whenever one of my stops is hit, I like to take a short “cooling off” period to re-evaluate my positions in the stocks. In this case, I’m not fundamentally concerned about Teekay LNG. The company has long-term contracts covering all its LNG tanker ships; it doesn’t have any meaningful exposure to commodity prices or LNG tanker demand.
Teekay currently pays 53 cents per quarter, equivalent to a yield of about 6.8 percent. Based on consensus expectations and my own evaluation of growth prospects, that payout should climb to about $2.26 annualized in 2008 and $2.55 or so in 2009. This represents annualized growth of about 10 percent. I’m adding Teekay LNG back to the Proven Reserves Portfolio with a recommended stop at 21.95.
Eagle Rock is a riskier play, which is why it’s in the Wildcatters Portfolio instead of the Proven Reserves. The partnership now operates two different businesses: E&P and midstream assets. The E&P assets consist of about 157 mature, producing oil and gas wells; the midstream business includes pipelines and processing facilities.
As noted earlier, the E&P MLPs have been the most pressured subgroup, and Eagle Rock hasn’t been immune to that. In addition, trading only 45,000 shares per day on average, it doesn’t take much selling pressure to hit the stock.
Nonetheless, there are myriad opportunities to expand in both the midstream and E&P business. And Eagle Rock should be able to boost its distributions by around 10 to 15 percent annually over the next few years. Yielding 8.2 percent based on projected 2008 distributions, Eagle Rock is added back to the Wildcatters Portfolio with a new stop of 14.25.
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