• Sell EPB
• XTXI added to Aggressive Portfolio; buy below $37 (see Best Buys)
• WNR added to Aggressive Portfolio; buy below $46 (see Best Buys)
• KMI downgraded to Hold
• KMP downgraded to Hold

Editor’s Note: In this issue we update the earnings results and more recent developments for all the portfolio holdings omitted last month. The recent analyst day updates from Energy Transfer Equity (NYSE: ETE) and Energy Transfer Partners (NYSE: ETP) are covered in this month’s In Focus.

Buckeye Partners (NYSE: BPL) received a free pass from investors after a disappointing third-quarter earnings report, its units trading modestly below summer highs but above the 50- and 200-day averages. Quarterly numbers were dragged down by weakness in natural gas storage and energy services businesses, while Buckeye’s crude storage terminal in the Bahamas posted impressive gains. The crude and refined products shipper raised its distribution 3.6 percent year-over-year for a 6.3 percent prospective current yield, even as the increased share count drove the distribution coverage down to 0.84x. The trailing 12-month coverage ratio looked better at 1.07x, and Buckeye’s plans to keep raising its distribution at the current pace seem realistic given the likelihood of strong fourth-quarter results, lower maintenance spending and the eventual returns on the investment in the former Hess East Coast storage terminals Buckeye recently acquired. This is a partnership expanding strategically while lowering its debt leverage at the same time thanks to improved profitability.  Buy BPL below $70.   

El Paso Pipeline Partners (NYSE: EPB) reported disappointing third-quarter results, with distributable cash flow down 15 percent from a year ago as a result of two adverse pipeline rate settlements and lackluster electricity generating demand blamed on cool weather. The distribution jumped 12 percent year-over-year and now shows a prospective annualized yield of 6.4 percent. Unfortunately, the downward rate adjustments on two pipelines will be a multi-year drag, such that the newly issued 2014 forecast from parent Kinder Morgan (NYSE: KMI) foresees no further distribution hikes next year at EPB. Even holding the distribution flat will require dropdowns from KMI likely to be financed, in part, with additional equity issuance. Growth projects currently under way won’t start making a difference until 2016. With growth challenged and profitability sapped by KMI’s incentive distribution rights and GP interest (to the tune of 39 percent of adjusted net income in the most recent quarter) better times are not just ahead. We expect growth-challenged MLPs further burdened with hefty IDR payments to significantly underperform next year. Sell EPB.

Genesis Energy (NYSE: GEL) is another partnership that did not sell off on disappointing results, treading water in a narrow range for the last month after reporting a 6 percent year-over-year drop in available cash before reserves in the third quarter. The supply and logistics segment incurred a string of unusual costs, including the hedges on refined product the partnership was unwilling to sell at the going rate earlier this fall.   

But the partnership claimed to be delivering double-digit growth after factoring out such temporary difficulties. On Nov. 14, Genesis paid a quarterly distribution of $0.5225 per unit, an increase of 10.6 percent year-over-year. Its cash before reserves provided 0.93 times coverage for this payout.  

 “While we had a number of items combine to negatively impact our reported results for the quarter, we remain confident in the fundamentals of our businesses and the positive impact a number of our announced organic opportunities will have, especially as we move into the second half of 2014,” said CEO Grant Sims. On the subsequent conference call, he added:

 “We believe we are well positioned to continue to achieve our goals of one, delivering low double-digit growth in distributions, which we have increased for 33 consecutive quarters, 28 of which have been 10% or greater over the prior year period and none less than 8.7%. Two, maintaining a better-than-investment-grade leverage ratio, which is less than 3.3x as we and our senior secured lenders calculate it. And three, having a strong coverage ratio, which will improve next quarter and grow from there.” Genesis has earned its longer leash over many good years. Buy GEL up to $55.

Kinder Morgan (NYSE: KMI) The general partner of Kinder Morgan Energy Partners (NYSE: KMP) and El Paso Pipeline Partners reported third-quarter cash available to pay dividends of $424 million, up  17 percent from $362 million for the same period in 2012. It raised its quarterly cash dividend to $0.41 per share ($1.64 annualized),  a 14 percent increase from a year earlier.

But investors are reacting badly to the 2014 financial forecast issued late on Dec. 3 that ruled out distribution increases at El Paso next year as a result of adverse rate rulings. KMI may continue to trade weakly in the near term after setting a new 2013 low on the news, but should be fine in the long run thanks to its IDRs, which allowed it to forecast dividend growth of 8 percent next year. But this the bad news from El Paso and the trading action are not encouraging developments in the short run, and we’re downgrading KMI to Hold.

Kinder Morgan Energy Partners (NYSE: KMP) is now forecasting a 5 percent distribution bump next year, hardly an insult given a yield that’s already at 6.6 percent but also not a reason to get excited. We’re downgrading KMP to Hold.    

Magellan Midstream Partners (NYSE: MMP) reported operating profit of $154.6 million for third quarter 2013, a big jump from $79.3 million for third quarter 2012. Distributable cash flow (DCF) was $141.1 million for third quarter 2013, 40 percent higher than a year ago. 

Contributions from the partnership’s growing crude oil segment, driven by Longhorn pipeline’s activation into crude oil service, the newly acquired New Mexico refined products pipeline system, and a more favorable pricing environment for commodities aided quarterly results. Magellan’s third-quarter distribution of $0.5575 per unit represented a 15 percent gain from a year ago, and the partnership stood by its goal of increasing per-unit distributions another 15 percent next year. Buy MMP below $60.

Oiltanking Partners (NYSE: OILT) continued to deliver rapid growth, reporting that third-quarter adjusted EBITDA more than doubled while revenue jumped 75 percent. The partnership cited higher storage service fees, throughput fees and ancillary service fee revenues.  On Oct. 21 the quarterly distribution rose to $0.445 per unit, an 18.7 percent boost over the prior year. The unit price topped a record $65 in the aftermath of the earnings news, before retreating 8 percent or so after the partnership launched a secondary equity offering of nearly 3 million units. But the fundamental and technical outlook remains bright, as rapid growth more than offsets the modest 3 percent current yield. Buy OILT on dips below $50.

Regency Energy Partners (NYSE: RGP) reported a 23 percent jump in third-quarter adjusted EBITDA even after adjusting prior-year results for an acquisition made earlier this year. The partnership cited volume growth in the Gathering and Processing segment driven by strong drilling activity in south and west Texas and in north Louisiana; as well as volume growth at the Lone Star NGL fractionation joint venture.

Regency boosted its distribution by a half-cent for a second quarter in a row, and its current 7.7 percent yield was supported by a 1.12x coverage ratio.

But the recently announced $5.6 billion acquisition of predominantly Appalachian gatherer PVR Partners (NYSE: PVR) looms as a major risk as well as an opportunity. The mostly equity deal will end up boosting Regency’s share count by nearly 50 percent. And while PVR’s underperforming assets could be worth it, the extra shares will in the meantime increase the incentive distribution rights payments to ETE.  Continue to hold RGP.

Spectra Energy Partners (NYSE: SEP) reported an 18 percent rise in third-quarter cash available for distribution. It declared a quarterly distribution of $0.51625 per unit, compared with $0.49 per unit for the third quarter of 2012.

The increases in both earnings and cash available for distribution were primarily the result of the August 2013 acquisition of 50 percent of the Express-Platte Pipeline System and the October 2012 acquisition of a 39 percent interest in the Maritimes and Northeast Pipeline. These increases were partially offset by $5.8 million of transaction costs related to the Nov. 1 acquisition of Spectra Energy’s (NYSE: SE) remaining US transportation, storage and liquids assets, as well as expected lower storage revenues at Market Hub Partners (MHP).

On Nov. 1, Spectra Energy Partners completed the acquisition of Spectra Energy’s remaining US transmission, storage, and liquids assets. The acquisition positions Spectra Energy Partners as one of the largest fee-based pipeline and storage master limited partnerships in North America, with more than 17,000 miles of pipelines. Continue to hold SEP.

Sunoco Logistics Partners (NYSE: SXL) announced that its adjusted EBITDA for the three months ended September 30, 2013 decreased $23 million to $181 million compared with the third quarter 2012.

But it provided a 22 percent distribution increase to $2.52 (annualized) backed by its typically strong 1.86x coverage ratio, and ended the quarter with a debt-to-adjusted-EBITDA ratio of 2.5x.

“As we continue to execute our growth plan, new assets are generating increasing ratable, long-term cash flow to help offset the recent market decline in our crude margin business,” said CEO Michael J. Hennigan.

“The third quarter was an excellent quarter financially for our base, ratable businesses. But as we predicted, softening market conditions in our crude oil acquisition and marketing business reduced our market related earnings.”  Our enthusiasm for Sunoco at a modest discount to the current price is undiminished. Buy SXL on dips below $67.

Targa Resources Partners (NYSE: NGLS) reported a 43 percent increase in distributable cash flow, which fully covered the 11 percent year-over-year distribution gain as recent capital spending began to pay off. Higher natural gas prices and fractionation fees drove the gains alongside new infrastructure deployments.

The partnership commissioned two large expansion programs this quarter – 100,000 barrels per day of additional fractionation capacity with Train 4 at the Cedar Bayou facility in Mont Belvieu, Texas, plus the addition of over 2 million barrels per month of export capacity at the Galena Park Marine Terminal in the Houston Ship Channel. These projects contributed to the partnership’s record third quarter adjusted EBITDA of $156 million. NGLS continued to forecast distribution growth of 7 to 9 percent next year, while its general partner and recent Growth Portfolio addition Targa Resources (NYSE: TRGP) expects to boost its dividend 25 percent in 2014. Buy TRGP below $85 and NGLS on dips beneath $44.

Teekay LNG Partners LP (NYSE: TGP) generated a distributable cash flow increase of 12 percent in the third quarter of 2013. It declared a third-quarter cash distribution of $0.675 per unit for a 6.9 percent prospective yield. Management said it plans to recommend a 2.5 percent increase for the fourth quarter distribution payable in February 2014.

The increase in distributable cash flow was primarily due to the partnership’s acquisition of a 50 percent interest in Exmar LPG BVBA, a liquefied petroleum gas (LPG) carrier joint venture with Exmar, in February 2013 and its acquisition and charter-back of a liquefied natural gas (LNG) carrier from Awilco LNG ASA (Awilco) in September 2013. Despite the recent price weakness, we remain bullish on the LNG shipping industry’s  long-term fundamentals . Buy TGP below $46.