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June 8, 2011

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MLPs and ETP as it Relates to Jim Cramer


There are people in the blogosphere and on Twitter who try to take shots at Jim Cramer to get traffic.  Cramer has taken shots back at several of them on Twitter, doesn’t seem like a winning long-term strategy.  For this post, I’m going the other way.

Source: Penn State.

Cramer has done an excellent job in general promoting the MLP sector to the individual investors who watch the show.  MLPs (more than 70% owned by retail investors) make sense for his audience, with their high growing tax deferred income.  Cramer routinely touts the biggest names in the industry, like Kinder Morgan Energy Partners (KMP) and Enterprise Products Partners (EPD), but also periodically has CEOs of some smaller MLPs like Linn Energy and Inergy on his show.

On last night’s show, Cramer made mention of 6 MLPs in total, and had an interview with Kelcy Warren, CEO of Energy Transfer Partners (ETP).  ETP has been hammered pretty hard of late, down around 18% since its peak just 6 weeks ago. A series of disappointing quarters, related to weak fundamentals for its intrastate natural gas business, weak storage fundamentals, and declining volumes for its propane business.


Last 12 Months Chart


Chart of Energy Transfer Partners, last 12 Months

ETP was once one of the fastest growing MLPs, growing its distribution 25% annually (175% overall) from the 4th quarter of 2003 to the 4th quarter of 2008.  Since late 2008, however, ETP has had 12 straight quarters without raising its distribution.  As a result, ETP underperformed the MLP sector significantly in 2009 and 2010, and YTD 2011 ETP has a total return of -8.6%, compared with a slightly positive total return for MLPs overall.

I give credit to Cramer for grilling Kelcy as much as can be expected, and it was fun to see Kelcy’s reaction when Cramer asked if the distribution was safe.  Kelcy, for his part, expressed disappointment in not being able to raise ETP’s distribution, and he also seemed to be angry that ETP is now being lumped in with MLPs that cut distributions in 2008 or have never increased them (like FGP).  See the video here.

Video Link

Highlights are Kelcy says disappointments have been the result of no basis differentials (recurring theme since 2008 and limited seasonal differences in natural gas pricing (the key for storage profits).   Kelcy said ETP won’t sell the propane business.  ETP is focused on growing their natural gas liquids (NGLs) business (like everyone else), in particular in the Eagle Ford Shale.

Cramer handled himself well with the ETP segment, and I appreciate him talking about MLPs and recommending them in the face of the sharp correction for MLPs overall since late April.  So, I’m going to give him a pass on his “Lightning Round” comments regarding Crestwood Midstream (CMLP).  When asked about CMLP, he basically said the yield on KMP (6.2%) is the same as the yield on CMLP (6.3%), and Kinder is the king of MLPs, so he’d rather own that one.

All of what Cramer said may be true, but I don’t think that’s a reason to own KMP over CMLP, particularly when KMP’s GP gets 45% of all cash distributions, compared with CMLP’s 7%, which makes it much more difficult for KMP to grow.  Not to mention CMLP’s enterprise value is approximately $1.4 billion, compared to almost $40 billion for KMP, so CMLP (with significant backers in First Reserve) should find it easier to make acquisitions that will be significant.  I am not recommending CMLP at all, and there are significant differences in their business mixes, my point is that yield and knowing Kinder’s name and track record are not a good reason to own it over another MLP with the same yield.  Bob Phillips (CEO at CMLP) has a pretty solid track record in his own right.

But, like I said, I give him a pass on that, because he can’t be expected to know much about a tiny MLP, and I’m generally pleased with the time he spends on MLP names in general.  What do you think of Cramer’s MLP coverage?
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. Long ETP, EPD, NRGY.  No positions in KMP, FGP or CMLP.

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