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September 1, 2010

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You Choose: All Three 7.5% Yield!

It has been several months since my last post, and although it’s cliche, I have been very busy.  I do plan to continue to write regular blog postings on MLPs once things settle down (probably starting in October).
One topic I would love to write about in detail if I had the time today would be this: I own 3 very different MLPs (EEP, NRGY and RGNC), all with the same yield of 7.5%. Which one would I most like to own for the next 12 months?  For the next 5 years?

It’s an interesting discussion because NRGY is predominantly a propane MLP, but with a growing and very attractive natural gas storage business.  NRGY has been in the 50% IDR tier for a long time, which has always been my knock against them (i.e. they have a higher cost of capital than competitors like SPH who have no IDRs).  NRGY recently announced they were going to merge with NRGP (their GP). This will create an MLP that in the future will not be constrained by its high cost of capital, even though NRGY has been able to grow consistently even with that drag.  But I get concerned about banking on the the sustainability of propane margins indefinitely.

EEP is a very old MLP that has great, stable pipeline assets, but until recently had not shown much growth.  Then right as they outperform for a quarter and announce a larger than expected distribution increase, they have a pipeline leak that attracts negative attention nationally.  The spill has been contained, but the costs of that event may offset the recent growth prospects in the short term.

RGNC is also undergoing quite a bit of change, going from a gathering and processing MLP to a pipeline company.  This improved asset risk profile is offset by a large amount of debt on its balance sheet.  RGNC is in the lower tiers of it’s IDRs and its GP was recently acquired by ETE, which has a management team with a track record of growing MLPs.

There is a fair amount of equity overhang on all 3 stocks, as NRGY typically does a few equity deals a year and RGNC still has some deleveraging to go.  So, for the next 12 months, it might be EEP as this perception around the oil spill slowly evaporates (like so much oil in the water), but I think RGNC is well positioned to be the winner longer term or at least up until the point when they merge into ETP.

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