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Category Archives: MLP Basics
MLP distribution announcement season is almost over, and it has bled into earnings season, which is in full swing this week even amidst the breaking storm clouds around the northeast (Austin sunny and warm, FYI). But with the vast majority of MLPs having announced distributions for the quarter, it’s a good time to review some of the distribution statistics (in between earnings conference calls). Also, in case you were wondering, in October the MLP Index was up 0.5% for the month and has produced 9.0% total return for the year. By comparison, the S&P 500 was down 1.85% in October and has produced 14.3% total return.
Back to distribution growth. There are three directions a distribution announcement can go: up, flat or down. Certain MLPs like to be consistent and get the investment community into a habit of expecting distribution increases. A quick glance at the names on the list of MLPs with the longest distribution growth streaks and it’s clear that growing distributions consistently makes for happy investors.
The second alternative is to keep your distribution flat. Certainly better than cutting your distribution, but a look hard enough at the names on this list, and for the most part you’ll see disappointed investors.
Then there is the third option, cutting your distribution. Usually it starts by cutting distributions to subordinated units first, then if things haven’t improved in a few quarters, the distribution to common gets cut as well. It can be a deep cut (OXF, NRGY) or a smallish one (RNO). This year, 3 MLPs have cut their distributions: NRGY announced a 46.8% distribution cut at the beginning of the year, RNO cut its distribution down to its MQD last quarter (a 7.3% cut), and OXF announced a 54.3% cut earlier this week.
Still no large cap midstream MLP has cut its distribution, but some day it will happen, and we’ve had some close calls so far this year, with BPL and NS in particular under-earning their distributions for several quarters now. Someone asked me what would happen to the rest of the sector if one of those two MLPs cut their distribution. I don’t believe NS will, but in any event, if a larger older MLP cut its distribution, I think they will have been beaten down to such an extent before it happens that the actual event won’t have a knock on effect on other MLPs.
Components of MLP Returns
Below is a chart of the drivers of the returns of the Alerian MLP Index. I saw this chart originally in a Barclays research report by Rick Gross. I’ve updated it, so I can call it my own now, but wanted to disclose where I got it from originally. What it shows is that so far in 2012, more than half of the total returns of the MLP sector have come from the distributions themselves, while just under half have come from distribution growth. The valuation component accounts for the changes in yield over time. Yields on MLPs have risen slightly since the beginning of the year.
The interesting part is looking back 3 years, when valuation played a much larger role than is normal. At the end of 2008, the MLP Index had a yield of more than 12%. That yield dropped to 6.1% as of September 30th. That yield drop drove outsized returns for the MLP index over the last 3 years.
Historically, income has accounted for the bulk of MLP returns, with distribution growth accounting for around 35% to 40% annually. A benign interest rate environment, probably the most benign we’ve ever seen, has certainly helped MLPs yields to come down, driving around 15% to 20% of the annual MLP returns. It seems like interest rates can’t go lower, and while there is room for MLP yields to compress and reduce the spread to those interest rates. But that valuation compression is a fickle thing to bet on. It’s best to bet on income and growth. Finding MLPs that have attractive yields and attractive growth rates is what you bet on, and you hope MLP yields don’t back up such that it overwhelms the other two components of return.
Distribution Growth: Top 20 This Quarter
So, which MLPs are growing distributions the fastest? Quarter over quarter this quarter, TLLP was the winner. Below is the list of the top 20 quarterly distribution growth rates, and their corresponding year over year and 3 year annual growth rates.
Life today is all about finding hacks. There are “life hack” themed blogs out there that are very popular, most offering tips on how to improve productivity and cut through information overload we all face. Lifehacker and Lifehack are examples. Most hacks are dedicated to finding a better or cheaper way to get the same results of a traditional and expensive method or product.
For example, with Skype, you can hack in-person meetings. By following certain blogs and Twitter accounts, you can hack your news consumption, avoiding traditional news media. The iPad is a laptop hack. Technology has even allowed many people to hack going into the office altogether.
The thing about hacks is they are inevitably not going to provide 100% of the experience of the circumvented task or product. For example, in a Skype meeting, the presence of the presenter is lost, along with the (sometimes awkward, sometimes very important) walking to the elevator conversations after the meeting.
I attended the Platts MLP Symposium last week, which was really well done with top notch speakers and interesting content. The size of the audience wasn’t on par with the content delivered. I think the cost of the conference may have had something to do with that, but also in this hack-able age, people are less willing to go the traditional routes if a reasonable facsimile can be obtained via other means. The traditional conference is one of those old school things that can be hacked, with mixed results. One way is via a virtual conference, another is just by recreating the agenda through your own primary and secondary research.
Virtual Conference Hack
There are firms out there that have started producing traditional conferences online, essentially taking the conference presentations and turning them into webcasts with 100% of the audience online either live or viewing it later, with live Q&A online and even with exhibit halls with booths from sponsors. They call them virtual conferences. One site, www.retailinvestorconferences.com actually put on a virtual MLP conference in April of this year, and has monthly virtual conferences, the latest of which featured VNR (an MLP) as a presenting company.
By going virtual, the conference producers can get a larger audience and charge less. The problem with virtual conferences as a user is just how distracting the rest of the programs running on your computer can be, or how many telephone interruptions you might have while trying to focus. Also, you don’t get the same networking effect of randomly eating lunch with someone at an in-person conference. Still, the technology is there, and the benefits mostly outweigh the drawbacks, so expect more of these virtual conferences in the future.
No Conference Hack
The other alternative is to forego the conference altogether. If you want to know about MLPs, for example, a conference probably isn’t necessary. Armed with an internet connection, a credit card and a phone, you can find out everything you need to know about MLPs. The main areas covered by the Platts conference are listed below with alternative sources for information about each:
- Regulatory Environment:
- Follow or join the National Association of Publicly Traded Partnerships (NAPTP), call and speak to the director Mary Lyman
- Contact and subscribe to ClearView Energy’s research on MLPs and energy regulations
- Commodity Outlook:
- Sign up for Bentek Energy’s NGL Market Monitor. I don’t know what this costs, but probably a lot because there is no price listed and you need to speak to a salesperson to get a quote
- Follow Rusty Braziel’s blog and Twitter account. Rusty was with Bentek, but is now doing his own thing (something I have huge respect for) called RBN Energy
- Talk to Wood Mackenzie
- Follow EIA data
- Talk to producers
- Talk to energy research analysts
- Legal Issues Around Sponsored MLPs
- Read partnership agreements of the MLPs you invest in
- Review this case dismissal regarding the lawsuit brought by HITE Hedge against KMI regarding EPB. It says that the G.P. can remove any fiduciary responsibility just by writing it into the partnership agreement
- Assume that as an L.P. investor, you have almost no recourse if the GP decides to do something that might benefit the G.P. at the expsense of L.P. unitholders
- Upstream MLP Opportunities
- Talk to equity research analysts in the space
- MLP Capital Markets
- Talk to equity research analysts, each of which produce weekly and monthly updates on MLP happenings
- Follow my blog
- Institutional Interest in MLPs
- Talk to Alerian, review presentations they produce and make public
- New Asset Classes and MLPs
- Follow my blog
If you wanted to learn about an individual MLP, they all make frequent SEC filings, post their investor presentations online, have quarterly conference calls, and have investor relations teams dedicated to answering your questions. So, other than the sometimes overrated “looking management in the eye” test, there is not a compelling need to spend money on plane tickets, hotel rooms and conference tickets to get information on individual MLPs.
On individual tax issues (which was not covered at the Platts conference) I would say consult a CPA that has dealt with MLPs before. Also, investorvillage.com has an active MLP board with many MLP veterans willing to share their experiences and free advice on MLP tax issues.
All of the above may seem pretty overwhelming, and it doesn’t offer the allure of a few days in Vegas or the networking opportunities available in-person, so it’s clear why there is still a market for conferences for those who can afford them.
Breakdown of MLP Conferences
If you do want to go to an MLP conference, there are several different kinds to choose from. If you’re looking to invest directly in MLPs, and want to choose among them, or if you just want to get the overall mood of the sector, the NAPTP MLP conference is the best for that, because you get more MLP investors and MLP management teams in one place than at any other event hands down.
- NAPTP Conference: 800+ attendees last year, presentations from more than 50 MLPs over 2 days, panel discussions on relevant MLP issues
- Investment Bank Sponsored Conferences: offer opportunities to meet management teams, hear from the firm’s research analysts
- Wells Fargo puts on a well-attended one in New York each fall that I attended last year
- RBC Capital puts on a good one in Dallas. I went in 2006, but not recently
- Citi puts on a 1-on-1 only conference in Las Vegas in August, which I have never attended. No presentations, just management teams meeting with institutional investors
- Lehman Brothers has an energy and power conference each fall. This year all of the presentations were available virtually, which was great
- Third Party Sponsored Conferences:
- Platts MLP Symposium: See below for review
- PWC MLP User Conference: designed for accountants, invite only conference. I will be speaking this year.
- Deal Flow Media MLP Conference: one time conference in New York that was well attended by the speakers of the conference, but didn’t have much of an audience
- Conferences that touch on MLPs like the OPIS National Supply Summit which will have me speaking as the only MLP topic of the event
So, there are plenty of conferences you can attend to hear management teams go through their investor presentations, which has its merits, but seems to be an old Wall Street concept: educating brokers on individual MLPs so they can go sell them to retail brokerage clients. It seems that in the new age of fee-based investment advisors over brokers, conferences focused on educating investors as to major industry trends and how to make good MLP choices could be very popular in the future.
Platts MLP Symposium Review
The Platts MLP Symposium last week covered timely and relevant MLP topics. The agenda was well thought out. It provided an expert and a discussion on the regulatory environment, several discussions and experts talking about commodities, panels on other issues like MLP structure, capital markets, ETNs/ETFs, and new MLP asset classes. The speakers were top tier and very knowledgeable. It was also a good opportunity for networking, which I could not have replicated from my desk. I would recommend it if you can justify the cost. If not, here is my hack of the conference…
Regulatory Review: Christine Tezak (Clearview Energy)
- Christine provided an overview of recent paradoxes in MLP tax treatment discussions, with the IRS expanding MLP qualifying categories with private letter rulings, but congress looking at ways to tax partnerships and remove energy tax break
- Takeaway: Nothing imminent, tax reform back on the table in 2013. Also, while MLPs don’t represent much revenue, no matter how small a deduction or tax break is, nothing is safe from the chopping block should congress ever get on the same page in terms of tax reform, including MLPs
Commodities and NGLs: John Edwards (Credit Suisse), Nathan Ticatch (Petrologistics), Anne Keller (Wood Mackenzie)
- Takeaway: NGL supply growth will keep NGLs oversupplied and NGL prices low, in particular ethane ($0.30 to $0.45 per gallon range according to John Edwards for next few years), for the next several years, but petrochemical plants that come online in 2016 and 2017 will balance the market. MLPs able to alleviate oil and NGL bottlenecks in the interim and provide for propane exports will be well positioned.
North American Commodity Outlook: Chris Miscak (Bentek)
- Really good presentation on North American energy situation
- Crude production growth will drive down waterborne crude imports to less than 5% of U.S. supply by 2022
- Additional onshore liquids infrastructure needed (to be built by MLPs)
- Exports required to balance propane market
- Domestic crude prices onshore will be significantly cheaper than global crude prices (with the exception of the northeast)
- Canadian crude will trade at a significant discount late in this decade as it struggles to find market
- Takeaway: Refineries and petrochemical companies will have structural commodity price advantages for the foreseeable future, MLPs that de-bottleneck the liquids system will do well
Corporate Governance Panel: Steve Jones (Tudor Pickering), Ethan Bellamy (Baird), Tom Heinzler (Anadarko), Bill Manias (CMLP)
- Takeaway: with a clearly communicated drop down strategy, strong independent directors (and a 4% MLP yield like WES has), the market doesn’t hassle you too much on valuation for assets you buy from the parent
Upstream Panel: Ethan Bellamy, John Ragozzino (RBC), Jim Jackson (BBEP), Bobby Stillwell (MEMP)
- Takeaway: Upstream acquisition opportunity set remains huge relative to the size of the upstream MLPs, expect torrid M&A pace to continue
- Takeaway: Each upstream MLP has its own source of deal flow and at this point haven’t butted heads too much competing for assets.
State of the Capital Markets: Gabe Moreen (BofA ML), Hinds Howard (Guzman & Company, Guzman Investment Strategies, mlpguy.com)
- Takeaway: despite record equity issuance YTD, there has been more than enough institutional capital flowing into MLPs to soak up all that equity
- MLP ETFs: $4.4bn in AUM
- MLP Open End Funds: $4.2bn AUM
- 100% of MLP IPOs are sponsor backed, either by corporate parent or private equity
- MLP secondaries have traded well in the aftermarket of late, but YTD aftermarket performance has varied as investors distinguish between MLP stories
Benefits and Challenges for Institutional Investors in MLPs: Kenny Feng (Alerian)
- Institutions are attracted to MLPs because of: attractive business models, attractive total return proposition, derivative play on energy boom, diversification, growing asset class
- Also, benign regulatory environment (vs Utilities), and lower cash flow volatility than REITs
- Energy infrastructure assets have: barriers to entry, provide inflation hedge, driven by Inelastic demand
- Continued growth of products for institutions to utilize for MLP exposure:
- MLP Closed-end Fund AUM: $9bn+
- MLP Open-end Fund AUM: $4bn+
- MLP Exchange Traded Products AUM: $10bn+
- New solutions are emerging that institutions are using, like Index separately managed accounts, direct investment, and total return swaps are coming back
- Takeaway: all systems go for now, especially in light of increasing pension fund participation in MLPs
New Asset Classes for MLPs: Robert Santangelo (Credit Suisse), Clay Womack (Adageo Partners)
- Variable MLPs offer better valuation than C-corps, and they have outperformed other MLPs the last 2 years, expect to see more variable distribution MLPs
- Takeaways from Clay:
- Expect to see proliferation of non-traditional MLPs
- Expect upstream MLPs to grow rapidly
- Expect to see non-traded MLPs sold to retail investor become more popular, like non-traded REITs
Sep 16th, 2012
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This week I went on a field trip as a guest of R.W. Baird to one of the oldest and prolific oil areas in the country: the Permian Basin. The trip included meetings with several MLPs with Permian operations, and a site visit from the one MLP that is actually based in Midland: Legacy Reserves (LGCY). Legacy showed us a well being drilled, then showed us a flowing well and a few other small steps along the crude value chain.
Because there are only a few non-stop flights out of Austin to anywhere (certainly not to Midland), I drove the 11 combined hours there and back. Therefore, I had several opportunities to sample the final product of this Permian oil at gas stations along the way. There were a few links in the value chain missing from the trip, but not many.
First stop on the tour was the drilling rig. It gets set up in a day, drills for 8-10 days, then gets taken down in a day. Its operated by 3 crews 24 hours a day, 4 men per crew. The drilling manager works for 4 straight days before getting replaced by another drilling manager.
We also saw where the drilling mud goes after it comes back out of the well, it goes into the pit shown below.
When the well is finished being drilled, the rig moves on to its next job, leaving behind the wellhead (the blue thing sticking out of the ground below. A pumpjack is attached and pumps oil out of the well. Everything that comes out of the well (oil, gas, NGLs, water, mud) goes into that little pipe in the lower right of the picture below.
Here is the pumpjack.
The little pipe to the right in the pictures above flows to a central tank area where the flow from several wells (in this case 4) is separated and measured.
Oil goes into the big tanks barely pictured in the left of the picture below. On the way there, this device measures the flow and is essentially an oil cash register.
From the tanks, the oil is picked up by trucks, and I guess taken to a refinery, although it might be stored somewhere along the way by an MLP like Plains All American. Maybe it ends up in Alon’s Big Spring refinery, where it magically gets turned into gasoline and might get sold by an Alon gas station pump like the one below.
Or perhaps Susser Petroleum Partners (pricing its MLP IPO this week) buys the gasoline and it gets trucked to a Stripes station (owned by Susser Holdings) instead.
Fascinating trip, worth the drive.
One more picture. Below is what 40-acre well spacing looks like. In every direction from the drilling site, at a very uniform distance, was a pumpjack signifying another well.