A Fast Start With More Promise
What a difference a year makes. In late February 2015, I wrote an article identifying the MLPs that had gotten off to the fastest start in 2015. At that time the top performers list was dominated by fertilizer producers. Terra Nitrogen (NYSE: TNH), CVR Partners (NYSE: UAN) and Rentech Nitrogen Partners (NYSE: RNF) were up respectively 54%, 48%, and 40% less than two months into 2015.
The top performer thus far this year, up 22.7% year-to-date (YTD), is TransMontaigne Partners (NYSE: TLP). TLP provided terminaling, storage, transportation and related services for customers engaged primarily in the distribution and marketing of crude oil and petroleum products. Last month TLP announced an increase in its quarterly distribution, and currently yields 8.4% with a coverage ratio for the trailing twelve months (TTM) of 1.33x.
Spectra Energy (NYSE: SE) and Spectra Energy Partners (NYSE: SEP) have both been mentioned in recent issues following SEP’s strong fourth quarter. SEP is among the top 20 performing MLPs thus far in 2016, and its general partner Spectra Energy is the second-best performer this year, up 21.2% YTD. Spectra owns and operates natural gas-related energy assets and a crude oil pipeline system connecting Canadian and U.S. producers to refineries in the U.S. Rocky Mountain and Midwest regions. Spectra Energy pays taxes as a corporation, which means distributions are 1099 income. Based on its most recent quarterly distribution, Spectra has an annualized yield of 5.6%, and a TTM coverage ratio of 1.27x.
In third place thus far is AmeriGas Partners (NYSE: APU), up 20.5% YTD. Even though last winter was slightly warmer than normal, this leading U.S. propane distributor still delivered 1.16x coverage on a distribution currently yielding 9.1%. The payout rose 4.5% in 2015 and should maintain that pace this year based on the partnership’s forecast for 9% EBITDA growth in 2016.
Kinder Morgan (NYSE: KMI) had an awful 2015, but last week’s disclosure that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A, BRK-B) purchased 26.5 million shares during the fourth quarter (valued at $396 million as of the end of 2015) was enough to convince many investors that better days are ahead. Shares rallied on the news, and are currently up 19% for the year. Of course KMI slashed its dividend in December, and currently yields only 2.8% on an annualized basis as it attempts to get its business back on the growth track that it maintained for so many years. Like Spectra Energy’s, KMI’s distributions are 1099 income.
Finally, in fifth place for 2016 thus far is another 1099 issuer. KNOT Offshore Partners (NYSE: KNOP) owns and operates a fleet of 10 shuttle tankers under long-term charters with major oil and gas companies engaged in offshore production. These shuttle tankers are used to transport oil from an offshore production facility where there is no viable pipeline alternative. KNOP is up 18.8% in 2016 after reporting record revenues, adjusted EBITDA and distributable cash flow for Q4 2015. The company has grown its distribution by 39% since its 2013 IPO, and currently has a coverage ratio of 1.2x and an annualized yield of 12.9%.
Thus far this year the top performers in the MLP space are lagging behind the pace set by last year’s early winners, but there is a lot more diversity among this year’s leaders. While the three top performers at this point in 2015 did end up among the top 10 MLPs for the year, none of them managed to sustain all of their blistering early gains. I think this year’s more diverse bunch has a much better chance of outperforming for the remainder of 2016.
Williams Weathering Storm
The Williams (NYSE: WMB) fourth-quarter press release trumpeted the 25% year-over-year EBITDA increase fueled by recently completed expansion projects, but the more relevant measure of the company’s performance was the decline in its dividend coverage to 0.91, from 0.99 a year earlier.
It says a lot about how far investor expectations (and midstream equity prices) have fallen that the results were nevertheless greeted with a sigh of relief. That was partly because Williams expects to keep growing this year as a result of pipeline expansions mostly backed by investment-grade natural gas buyers. But it also helped that Williams listed a variety of reasons it won’t be hurt too badly should its top customer, Chesapeake Energy (NYSE: CHK), file for bankruptcy, as it may have to do as early as next year without a meaningful rally in energy prices.
Williams has long-term gathering and processing contracts with Chesapeake, many with onerous minimum volume commitments because production’s fallen short of onetime plans, But Williams management expects these deals to hold up in a restructuring, and even if they don’t Chesapeake has no ready alternatives to Williams pipes if it wishes to keep most of its wells pumping, noted the Williams CEO on last week’s conference call. We recently arrived at similar conclusions in evaluating the midstream fallout from a potential Chesapeake bankruptcy.
Despite WMB’s 44% rebound since the Feb. 8 panic low, the stock trades at an implied discount of 13% to the value of Energy Transfer Equity’s (NYSE: ETE) buyout offer, which includes a promised $8 per WMB share in cash.
That’s hardly extreme, especially in light of today’s New York Times report that ETE has recently considered offering Williams $2 billion in cash to scuttle the deal. But Energy Transfer remains publicly committed to the deal, if only because it doesn’t seem to have a plausible escape clause.
And Williams’ current price should prove a bargain over time whatever happens to the merger, especially in light of the company’s attractive long-term exposure to growing domestic natural gas demand. Its cash flow, which was recently hurt by 13-year lows in natural gas liquids prices, should improve rapidly as energy prices rebound and the new pipes come online. Aggressive pick WMB is upgraded to a buy below $20.
— Igor Greenwald