Moving Targets to Stock Up on Winners
Boardwalk Pipeline Partners LP (NYSE: BWP) announced solid first-quarter results, including a 24 percent increase in distributable cash flow that covered the latest distribution with a ratio of 1.21, though that was driven in part by unusually low expenditures of maintenance capital.
On May 28, the pipeline operator and recently added Conservative Portfolio holding further excited investors by finalizing joint venture agreements with Williams (NYSE: WMB) for the hotly anticipated Bluegrass Pipeline, slated to deliver natural gas liquids from the booming Marcellus and Utica shale plays in northeast US to the petrochemical plants along the Gulf Coast. The project, slated to enter service in late 2015, would take advantage of an existing and currently underused Boardwalk gas pipeline running from Kentucky to Louisiana.
The unit price reached a two-year high on the news, but tumbled two days later after Boardwalk unveiled a $330 million equity offering, with proceeds earmarked for paying down debt but also contributing to capital spending.
The subsequent decline has pushed the annualized yield to 7.2 percent, a good deal considering Boardwalk’s stable business and promising growth prospects. Continue buying the dips below $30.
Buckeye Partners LP (NYSE BPL) has shaken off last year’s funk with a vengeance, trading strongly in response to robust operating results and resumed distribution growth, as described below in Best Buys. We’ve raised our buy below target to $70 because the units are attractive at the current modest discount to that threshold.
DCP Midstream Partners LP (NYSE: DPM) raised its distribution for the 10th straight quarter after reporting solid quarterly results. The partnership has excellent visibility into near-term growth thanks to likely dropdowns from thriving sponsors, as outlined in Best Buys. We’re raising our buy below target to $50.
El Paso Pipeline Partners LP (NYSE: EPB) announced a 22 percent year-over-year quarterly distribution hike in April as acquisitions of additional interest in partially owned ventures boosted cash flow, while integration with new corporate parent Kinder Morgan (NYSE: KMI) significantly cut overhead costs. Total revenue was flat, but the Southern Natural Gas subsidiary did see strong demand from utilities in its southeastern US footprint and profited from a recently completed expansion project.
The acquisition by Kinder Morgan certainly takes most of the guesswork out of the equation for EPB, as the new general partner prides itself on meeting or beating forecasts and is highly likely to deliver on the budgeted 13 percent distribution increase for all of 2013, In the longer term, Kinder Morgan hopes to grow distributions per unit by 5 to 6 percent annually over the next five years.
Key to that strategy will be the dropdown this year of KMI’s 50-percent interest in Gulf LNG, a venture seeking to export liquefied natural gas from Kinder Morgan’s terminal in Pascagoula, Miss., as well as longer-term plans for LNG exports from El Paso’s Elba Island storage terminal near Savannah, Ga.
But while moderate growth is almost certainly in the cards, the upside is limited by the heavy toll of the general partner’s incentive drawing rights as well as an at the market facility providing for opportunistic unit sales totaling $500 million, of which only $22 million has been realized to this point.
Despite those negatives, the current 6 percent yield and sponsorship from industry giant Kinder Morgan provide a decent margin of safety, and EPD remains a buy below $42 on dips like the one we’ve just witnessed.
Energy Transfer Partners LP (NYSE: ETP) reported strong quarterly numbers under a simplified corporate structure that’s vested in it subsidiaries previously controlled by its general partner, Energy Transfer Equity (NYSE: ETE).
But one thing ETE can boast that ETP still lacks is distribution growth; ETP’s payout has been flat for five years now as the parent has prioritized acquisitions. On the latest conference call, management professed a strong desire to deliver a higher payout at long last, but only if there’s enough distributable cash flow to cover the increase.
Meanwhile, the interstate pipeline operator continues to invest in new projects, embarking on various initiatives valued at $3.4 billion since late 2010 and now considering the next wave worth $1.5 billion. Most promisingly, the northeast pipelines of subsidiary Sunoco Logistics (NYSE: SXL) have positioned ETP to take part in the development of the Marcellus and Utica shale plays, while its Gulf Coast facilities will be used to export liquefied petroleum gas and, it is hoped, eventually LNG as well.
The problem here is that it will be hard to increase ETP’s distribution given the heavy toll of ETE’s incentive distribution rights, which have consumed the bulk of ETP’s distributable cash flow in recent years. The dropdown of additional assets to ETP in the recent reorganization seems to have eased this drain, but a buyout of the IDRs if not of ETE itself may be in order down the road to lower this bar to growth.
In the meantime, the recent market correction has nudged the yield back up to 7.4 percent and the unit price back below our limit. There’s nothing wrong with buying ETP below $50, but ETE frankly seems like a better opportunity right now, despite its more modest 4.5 percent yield, based on the value of its IDRs. See more on ETE in Sector Spotlight.
Enterprise Products Partners LP (NYSE: EPD) has hiked its payout for 35 straight quarters, and the most recent distribution represented a 7 percent increase year-over-year. The biggest, safest and most creditworthy MLP has $7.5 billion of growth projects in the works, and if they merely deliver the minimum expected rate of return the payout could rise 23 percent over the next two years.
That makes it easier to stomach EPD’s relatively modest 4.5 percent yield, as does the fact that the partnership is no longer on the hook for IDRs after buying out its general partner a few years ago. The unit price is down a reasonable 7 percent from last month’s record high, and I think it could get back there in a hurry. EPD’s scale, financial prudence and reliability are unmatched. We are raising our maximum Buy price to $66 in light of these long-term advantages.
Genesis Energy (NYSE: GEL) has grown just as reliably and even more impressively for a long time. The oil-oriented midstream operator has boosted its payout for 31 consecutive quarters, usually by more than 10 percent over the prior year, as was the case again recently.
Genesis operates land and offshore oil pipelines connecting Gulf of Mexico and Gulf Coast producers with refineries in the region and beyond. It also helps refiners turn sulfur into sodium hydrosulfide for sale to miners and paper producers. Finally, Genesis runs a fast-growing logistics business whose reach now extends from a Wyoming rail loading terminal designed to ship the crude from nearby wells to the refiners in all four corners of the country to another rail facility in Mississippi slated to process bitumen from Canada’s oil sands.
The partnership posted a 19 percent revenue increase in the most recent quarter, and more growth looms ahead as it completes a new pipeline to promising wells far out in the Gulf in a partnership with Enterprise Products Partners. Annual growth of 10 percent can turn the current 4 percent yield into a gusher of more than 7 percent within six years if the unit price merely marks time. We’re upgrading Genesis to a Buy up to $55.
Inergy Midstream LP (NYSE: NRGM) will become a much larger and significantly altered enterprise following the planned merger with Crestwood Midstream Partners LP (NYSE: CMLP), described more fully in the In Focus section below. We like the diversification and scale advantages the merger might confer, but not the premium paid to effective acquirer Crestwood, nor the likelihood that the expanded asset base will accelerate incentive distribution rights payments to Inergy (NYSE: NRGY). The rating on NRGM is being lowered to a Hold until we see how the combination plays out.
Kinder Morgan Energy Partners LP (NYSE: KMP) continued to deliver the steady growth investors expect from one of the industry’s largest and most diversified pipeline operators. The first quarter distribution rose 8 percent year-over-year.
In May, Kinder Morgan closed on the acquisition of Copano that will further extend its network. None of which spared the units from selling pressure at the end of the month after the partnership canceled plans for the $2 billion Freedom Pipeline, which would have linked Texas oil wells to California refineries. The refiners resisted getting locked into long-term supply contracts, opting for the flexibility of offered by rail transport.
But Kinder Morgan certainly has plenty of other growth opportunities, including the subsequently announced expansion of the oil terminal it has under construction in the Houston Ship Channel. True, it will need many such smaller-scale projects to make up for the lost opportunity on Freedom, but if anything else the refusal to build on spec continues to showcase the partnership’s financial prudence.
At the current price, the units yield 6.3 percent based on the expected 2013 distribution, offering solid value. Continue buying KMP below $86.
Legacy Reserves LP (Nasdaq: LGCY) is an upstream oil and gas driller with interests in the Permian Basin, Mid-Continent and Rocky Mountain region and a yield of 8.4 percent. The latest results showcased solid integration of the big recent acquisition, the $ 500 million in Permian Basin assets from Concho Resources (NYSE: CXO). These boosted first-quarter production 25 percent over the fourth quarter of 2012. The 10th consecutive distribution increase lifted the payout by 3.6 percent year-over-year, with 1.06 coverage ratio based on distributable cash flow. With more acquisitions in the pipeline, future secondary offerings are likely. But the latest operating results were very good and the Concho purchase should continue to reap cost efficiencies. We’re upgrading LGCY back to a Buy below $29.
Linn Energy LLC (Nasdaq: LINE) continued to feel heat from short-sellers in the wake of its disappointing first quarter and the delay in the scheduling of shareholder votes related to the pending merger with Berry Petroleum (NYSE: BRY). But management remained emphatic that the merger will go ahead in the next quarter, and optimistic about its pipeline of other accretive deals. This is proven and experienced executive team, and while the 9.1 percent yield and disappointing price action hint at widespread apprehension, I expect a lot of that to dissipate once the Berry merger closes. Continue to buy LINE below $40.
Navios Maritime Partners LP (NYSE: NMM) remains a controversial holding amid an ongoing slump in the dry-bulk shipping market, and indeed it would foolish to presume any yield above 12 percent as “safe” in this ultra-low interest-rate environment. Still the real crunch with the expiration of the long-term charters doesn’t arrive until next spring, and the sze of the current yield strongly suggests the market is aware that a cut is likely. Meanwhile, the unit price has displayed surprising buoyancy amid the recent downdraft in shipping rates. We have at least a few months to see if global growth worries might relent. In the meantime, NMM remains a hold as it was under my predecessor.
Vanguard Natural Resources (Nasdaq: VNR) was recently pushing 52-week highs after a solid quarterly report, before a big secondary offering dropped the units back into the middle of their long-time trading range. The prior $30 buy below target sounds a bit rich, considering that the units haven’t traded above that level in nearly two years. But the 8.7 percent yield remains attractive and relatively secure, so I would continue buying the dips below the reduced $28 level.