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January 5, 2012

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MLP Over Unders: Place Your Bets

My father was a gambler.  On my 21st birthday, we went to Vegas together and he showed me the old, off-strip Vegas.  We stayed downtown at Binion’s Horseshoe (back when it was still owned by Binion Family).  Dad told me crazy stories of his trips to Vegas in the late 1970s and early 1980s.  Stories of hookers, cocaine and mirrors on the ceiling, stories of walking miles to the airport after losing everything at the blackjack tables, and stories that were crazier still.

(I still carry this chip around from that trip)

On our trips, we created memories of our own (much tamer ones).  There was the time we played catch with a football on the neon-emblazoned Fremont Street in the middle of the night.  There were the times we grabbed the $2.99 hamsteak meal upstairs at Fitzgerald’s at 2am, or a short stack of pancakes at the Golden Gate Hotel cafe.  There were bad beats and great runs of luck.  We got into a rhythm for the few years after I graduated college where we would make a trip to Vegas for the last week of the NFL season, which usually coincided with New Year’s Eve.   Now with him gone and me with 3 kids, I haven’t been to Vegas in a few years.
In honor of what would have been that weekend this week, let’s go through some Sportsbook-like lines for some MLP prop bets.  The way it will work: I’ll list MLP stats, make up a line, and then give my opinion about whether we see over or under than line for 2012.  Then we can have something to review at the end of this year.  Feel free to chime in with your opinions in the comment section below.
Number of MLP IPOs: 9.5

  • My Pick: Under

There are 4 IPOs currently in various stages of the SEC registration process (see the table below).  There are also 2 or 3 other companies that have announced their intention to form MLPs.  There were 13 MLP IPOs in 2011, tied for the most ever with 2007.  There have only been 10 MLP IPOs or more in a given year 3 times (out of 15 years of data).  I just think 20+ MLPs added in 2 years is going to be too much and won’t happen, no matter how many ETFs are created.

There are bankers out there today trying to prove me wrong, which would be fine.  The more MLPs, the more important it becomes to hire someone to pick the right ones.
Number of GP Holding Company IPOs: 0.5

  • My Pick: Over

There was one GP IPO in 2011 (Kinder Morgan, Inc. – $KMI), and one GP IPO in 2010 ($TRGP).  Generally speaking, GPs won’t go public unless they reached the final tier of their incentive distribution rights (IDRs).  To narrow down the candidates, we need to narrow it to the ones that (1) have private GPs (i.e. they don’t already have a public GP that may have other assets, such as EEP with parent ENB), and (2) pay a current distribution rate at or above the highest IDR tier.  It turns out there are only 5 such MLPs: PAA, DPM, CMLP, MMLP and TLP.  Below is a chart that outlines the cash that flows into each respective GP holdco at the current quarterly distribution rate annualized and with the current units outstanding for each.

The real potential contenders are PAA and CMLP.  DPM’s GP is owned by DCP Midstream, a private company owned 50% by Spectra Corporation and 50% by ConocoPhillips.  It seems unlikely that they would monetize their interest in the GP at the current time when there are still assets to drop down from DCP Midstream.  TLP’s GP (ultimately Morgan Stanley) just doesn’t seem very motivated to do much of anything.  MMLP is possible, especially in light of some inter-family disagreements over interests in the GP over the past few years, but they’ve got some work to do in getting MMLP to trade better before they launch a GP IPO.  So, maybe next year for them.

That leaves CMLP (GP owned partially by First Reserve Corporation) and PAA (owned by management – 5%, OXY with 35%, Kayne Anderson and affiliates – 27%, and Lynx Holdings and Energy Minerals Group – 25%).   CMLP’s GP is going to want to exit at some point, but I would bet on next year or year after.  PAA is one of the largest MLPs out there, and ownership is no doubt watching how well KMI and TRGP have traded of late, and have realized there are no other pending GP IPOs.  This might finally be their chance to take center stage with a massive GP IPO of their own.
Amount of Equity Issued by MLPs (including IPOs): $30.0 billion

  • My Pick: Under

The amount of equity issued by MLPs eclipsed $20 billion for the first time ever in 2011.  Total equity issued has grown at an average annual rate of 60% each year the last 3 years.  $30.0 billion would be around a 50% increase year over year, so it seems like a good number.  I take the under on this, because I’m betting that much of the capital needed for this year was raised in the 4th quarter of this year for many MLPs.
Where I could be wrong: MLPs might choose to issue capital for their 2013 capital budgets at some point this year.   Also, if valuations keep rising as they have since October, MLPs will be trying to issue as much equity as they can while times are good.
Number of New MLP ETFs (not including ETNs): 3.5

  • My Pick: Over
AMLP has been too successful from an ETF sponsor perspective to stop others from entering (although AMLP has a large first mover advantage in terms of finding asset scale).  I predict 2 large, well-marketed ETF launches, and 2 small, not well-funded or well-marketed issues.  There may even be an actively managed ETF at some point, because you can only have so many index ETFs, right?

MLP Consolidations (an MLP buying another MLP): 1.5

  • My Pick: Over

I think we’ll see at least one consolidation from one of the 2 sets of MLPs that share the same GP, so either ETP buying RGP or KMP buying EPB.  The historical comparisons are EPD buying TPP after consolidating the GPs, and WPZ buying WMZ.   Beyond those sort of clean up deals, I think this is the year that one of those MLPs that people view as targets get acquired by other MLPs.   Independent MLPs like CPNO, MWE and PVR are ones I hear mentioned as candidates, but there are others.
Distribution cuts: 0.5

  • My Pick: Over

In 2011, there were no quarterly distribution cuts (not counting variable distribution MLPs), not even from Niska Gas Storage (NKA) which has the highest yield in the sector at 14.5%.  I expect that there will be at least one cut, as some MLPs that are reliant on active natural gas spreads and high propane prices finally run out of time for natural gas to rebound.
Returns: 0.0% over the S&P 500

  • My Pick: Over
The secular growth story behind the energy infrastructure assets owned by MLPs is better than large cap domestic stocks generally.  Despite entering the year at all time highs on the index, MLPs have seen high valuations before in term of yields and yield spreads.   Also, I expect capital to keep moving towards MLPs as the income oriented investing theme continues to grow given where CD rates and treasuries are yielding.  ETF asset growth is also going to contribute to more fund flows into MLPs.  All of this will lead to another year of MLP outperformance compared with large cap stocks, in my opinion (which is my own and should not be relied upon to make investment decisions!).

What do you think?
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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