We’re in earnings season and several Master Limited Partnerships provided updates this week that were generally unsurprising and reflected the stability of their business models. On Monday, Energy Transfer Partners (ETP) announced an 8% year-on-year increase in their distribution. Their GP Energy Transfer Equity (ETE) increased its distribution 37% on a year ago. These securities yield 9.5% and 5.5% respectively. ETE expects to close on its acquisition of Williams Companies (WMB) during 1Q16 which will add Williams Partners (WPZ) to the family of its MLPs it already controls (along with ETP they also control Sunoco LP and Sunoco Logistics Partners, LP).
Enterprise Products Partners (EPD) announced earnings showing 5% growth in distributions with 1.3X coverage. Its price rallied but still yields 5.8% based on its forecast next twelve months’ distribution. WPZ reported a 21% year-on-year increase in 2015 EBITDA driven by good performance from several fee-based projects. WPZ rallied on the news although curiously its future controlling entity ETE did not, even though ETE will ultimately benefit from this performance through its ownership of WMB. On the earnings call Williams noted that low prices for natural gas had led to about 900 million cubic feet (MMCF) per day of “shut-ins” whereby the E&P company temporarily stops producing natural gas because of the low market price or lack of infrastructure to get it to market. To put it in perspective, the U.S. consumes around 77 BCF per day, so this is a little over 1% of consumption. It didn’t seem to hurt results and they expect some of that production to come back online in the near term.
Overall, results were steady and unspectacular, which is usually the case. Distributions were as expected, growth guidance was generally reaffirmed. As I often say, the business performance is far less exciting on a quarterly basis than one might conclude by observing movements in MLP unit prices.
Kinder Morgan (KMI) also issued a $1.6BN mandatory convertible security, and regrettably it looks as if they were ripped off by their bankers. When they began contemplating alternatives to issuing equity, their stock was trading in the low $30s and their reluctance to sell equity at this level was understandable. Instead, they’ve sold equity at possibly as low as $27.56 (the lowest possible price at which conversion can occur). This is where their shares wound up when the deal was priced, no doubt depressed by the underwriters shorting the stock to hedge the new convertible issue. The 9.75% coupon they’re paying on this security is higher than either KMI’s debt or equity even though it sits between those obligations in seniority on their balance sheet, and the only risk being taken by the investor is the possibility of being converted into common at $27.56 at a time when the market price is below that. While the rating agencies treat the issue as equity, those bearish on the security will argue it’s high-cost leverage and that management is signaling they’re worried that the stock is headed much lower than $27.56. The bulls will see it as super expensive, dilutive equity. It’s inconceivable that KMI expected this outcome; they would have been far better off continuing with their original plan of regular equity issuance. A rare lose-lose from Rich Kinder.
My new book, Wall Street Potholes, was just released and it’s aimed at retail investors. I may have to start working on another version written for capital markets clients outfoxed by their bankers.
Overall, there wasn’t much over the past week in fundamental news to provide much support to bears. The most negative issue might be the continued volatility and relatively high dividend yields.
We are invested in EPD, ETE, KMI and WMB
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.