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December 7, 2011

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Conference Thoughts: The Market Doesn't Give us Credit For...

I attended the Wells Fargo 10th Annual Pipeline, MLP & E&P, Services and Utility Symposium in New York yesterday.  The conference was very well attended, plenty of fancy ties, smug faces and iPads.  I didn’t bring any of those things, but was still allowed in.

Tales of Wells Fargo, apparently a TV series in the late early 60s on NBC

The conference opened with an address from research analyst Sharon Lui, offering a review of the sector in 2011 and expectations for 2012.  She noted MLPs are outperforming again in 2011, although the highest flyers have been midstream c-corps, the result of E&P spin off plans (like WMB) and acquisitions (like EP and SUG).
Lui noted that Shale development, petro-chemical demand and high crude / NGL prices are all driving record investment in new projects.  Capital markets are wide open, with record debt and equity issuance in 2011, and a very robust IPO market.   Fund flows remain positive as investors seek high yield, new and creative products (ETFs, ETNs, mutual funds) continue to pop up to fill that demand.

Wells Fargo is projecting 7.3% yield and 7.4% capital appreciation (resulting from 6-7% distribution growth) for MLPs in 2012, so 14.7% total return.  They expect general partners and NGL focused gathering and processing MLPs to continue to outperform.|

Later in the day, Bentek Energy’s President Porter Bennet had an interesting overview of the domestic production and commodity price picture.  He noted that natural gas production will continue to overwhelm demand and weigh on prices and differentials.  He said that would be the case unless about 30% of the drilling rigs currently operating in the country were to be laid down for some extended period of time.
Tim Fenn’s tax panel was also lively and interesting, particularly the statistics on who owns MLPs as collected by PriceWaterhouseCoopers K-1 processing group.  Lots of discussion about owning MLPs in tax-exempts despite the UBTI.

Company Presentations: What the market doesn’t get about us…

Oh, and there were also 4 tracks of company presentations, allowing for more than 50 MLPs to give presentations yesterday.  I’m still sifting through webcasts for MLPs I didn’t see.  But so far, what struck me watching these presentations was how management teams all have a boogeyman out there in the investment community they are chasing.  In other words, each MLP management team believes the market perceives them incorrectly and is missing the important part of their story.

For example, Martin Midstream (MMLP) management is convinced MMLP’s poor stock price performance and relative valuation is a result of the market lumping them in with shipping MLPs, and the CFO said so in his presentation yesterday.  Only 10% of its EBITDA comes from shipping, and MMLP is not investing further in that business, so they should not be considered a marine transportation business any more.

While there may be a small amount of investors who dismiss MMLP as a shipping MLP because of its heritage, there are probably more potential investors that stay away from MMLP because of its limited float and liquidity, small size, higher leverage, limited growth (0.6% distribution CAGR last 12 quarters), and thin distribution coverage.  It’s comforting for people that prefer to ignore those other factors to buy into the concept that MMLP is great, the market just thinks they are a shipping MLP.  

For Chesapeake Midstream (CHKM), CEO Mike Stice thinks the market should give CHKM more credit for its organic growth potential rather than focus on the drop down story.  Stice was almost complaining about how often he gets questions about drop downs.  Stice did go on to say he has visibility into $500 million of drop down acquisitions per year for the next 10 years, so pretty obvious why that is the focus.

Some MLPs have a legitimate beef, such as Eagle Rock (EROC), which shouldn’t be viewed as distressed or highly levered any longer, given the great strides they have made since 2009 to clean up the balance sheet and re-position itself for growth again.

My Boogeyman

Creating boogeymen can help you avoid some harsh truth about yourself or your performance.   I think we all do that, it’s human nature.  For me, I haven’t attracted as many clients as I thought I’d be able to here in Boston, and I will sometimes try to convince myself that high net worth individuals in the Boston area are somehow wired differently as a result of geography.  The line of thinking is that the market in Boston is more saturated with money managers, so investors have their guard up more and are more skeptical than they are in other parts of the country.

I firmly believe MLPs are under-owned in this geographic region, and have focused on actively trying to track down those that don’t have MLPs in their portfolio and educate them on the sector.   It hasn’t worked well locally, and that’s more about me than the market, if we’re being honest…

Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.

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