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Issues

The MLP Class of 2014, Part 2

Investors flock to MLPs for their above-average yields and exposure to the US shale oil and gas revolution. But instead of simply picking the highest-yielding stocks, investors should consider the potential for price appreciation.

Over the past three years, investors seeking differentiated returns have found recent initial public offerings (IPO) in the MLP space to be a fruitful hunting ground.

In 2011, two fledgling MLPs--Golar LNG Partners LP (NYSE: GMLP) and Tesoro Logistics LP (NYSE: TLLP)--cracked the list of that year's top 10 performers. This number increased to six in 2012 and four in 2013. And thus far in 2014, recent IPOs have accounted for four of the top-performing MLPs.

In this issue, we highlight three forthcoming IPOs that investors should put on their shopping lists and delve into the remainder of this year’s debutants.

We covered GasLog Partners LP (NYSE: GLOP), Cypress Energy Partners LP (NYSE: CELP), Viper Energy Partners LP (NSDQ: VNOM) and Foresight Energy Partners LP (NYSE: FELP) in the July 18 issue of Energy & Income Advisor.

The MLP IPO Class of 2014, Part 1

Energy-related master limited partnerships (MLP) have completed seven initial public offerings (IPO) thus far in 2014, bringing the universe of publicly traded partnerships to an all-time high.

Although some of these fledgling partnerships operate assets familiar to most investors, the class of 2014 also continues the expansion of this security class to several niche industries, including renewable energy, wastewater management and pipeline inspection.

Meanwhile, recent IPOs have included Foresight Energy Partners LP (NYSE: FELP), the first coal producer to debt as a publicly traded partnership since 2010, and Viper Energy Partners LP (NSDQ: VNOM), a spin-off of Diamondback Energy (NSDQ: FANG), which has reignited investors’ interest in mineral rights.

Distributions May Vary: The Smart Investor’s Guide to V-MLPs

Many energy-related masted limited partnerships (MLP) own assets that generate reliable cash flow and exhibit limited sensitivity to commodity prices, credit conditions and the state of the economy.

Names that own midstream assets--pipelines and other infrastructure that transport hydrocarbons from the wellhead and prepare them for sale--often generate their cash flow from multiyear agreements that guarantee a minimum payment. Of course, investors must keep tabs on when these contracts end and whether expiring contracts can be renewed at similar, or more favorable, terms.

Whereas publicly traded partnerships usually privilege reliable cash flow and distribution growth, variable-rate MLPs (V-MLP) offer a different value proposition and make no effort to hedge their exposure to commodity prices or economic conditions.

These publicly traded partnerships deliver distribution coverage of 100 percent each quarter, but their payouts will vary depending on the performance of their underlying business.

Most V-MLPs own and operate downstream assets such as refineries or chemical plants--industries where earnings fluctuate with commodity prices and exhibit greater volatility than in the midstream segment.

When V-MLPs’ underlying businesses are in the sweet spot, these names can deliver big-time price appreciation and stratospheric yields of 20 percent to 30 percent; however, if business conditions deteriorate, it’s not unheard of for a V-MLP to omit its quarterly payout entirely.

Here's our guide to the high risks and rewards in this niche segment of the MLP market.

The Search for Yield Compression

Despite the dramatic changes that have occurred in the universe of publicly trade partnerships since the 1980s, the basic appeal of this security class to investors has remained the same: above-average yields and significant tax advantages. 

But from  2011 to 2013, price appreciation accounted for an average of 87 percent of the total return posted by the top-performing MLPs from each year. Thus far in 2014, climbing unit prices have contributed about 93 percent of the total return posted by the top 10 publicly traded partnerships.

Roger Conrad and Elliott Gue’s Top Energy Takeover Targets

Whole-company takeovers in the energy sector peaked in 2011, when companies completed almost $192 billion worth of deals.

Mergers and acquisitions activity in the energy patch has slowed in subsequent years, declining by 41 percent last year; however, the premiums paid in these deals have steadily increased in recent years--a boon for investors who own these names.

Over the years, we’ve amassed a solid track record of identifying takeover targets, including mining equipment producer Bucyrus International, Bakken operator GeoResources and artificial-lift specialist Lufkin Industries.

More recently, Energy XXI (NSDQ: EXXI) offered to purchase Model Portfolio holding EPL Oil & Gas (NYSE: EPL) for a premium of 33.4 percent.

Our Secret: Focusing on high-quality names that trade at reasonable valuations. Holding a name that can’t stand and grow on its own in the hope of a takeover isn’t a winning strategy.

View from the Oil-Field Services Patch

Each earnings season, we look forward to poring over quarterly results from the big four oil-field services companies–Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL), Baker Hughes (NYSE: BHI) and Weatherford International (NYSE: WFT).

The big four’s conference calls to discuss quarterly earnings–particularly the wide-ranging discussions hosted by Schlumberger, the world’s largest oil-field services company–provide invaluable insights into other aspects of the energy patch.

In the past, closely listening to Schlumberger’s quarterly conference calls has helped us to profit from rapidly improving margins in the marine-seismic services segment in 2010 and to avoid much of the fallout from the collapse in pressure-pumping prices that occurred in 2012.

More recently, trends identified by the major oil-field services firms prompted our bullish stance on proppant producers, US Silica (NYSE: SLCA) and Hi-Crush Partners LP (NYSE: HCLP). We recently booked a 56 percent gain on the latter in our Model Portfolio.

The read-through from Schlumberger and the other major oil-field services companies’ earnings reports and subsequent conference calls are particularly useful because they occur before many other energy-related names announce quarterly results.

LNG Investment Bible, North American Edition

US and Canadian oil and gas producers have long coveted exports of liquefied natural gas (LNG) as a potential release valve for the domestic oversupply of natural gas, a product of the industry’s aggressive drilling in the Marcellus Shale and other prolific unconventional resource plays.

Although surging output from US shale fields enabled the US to offset declining volumes from the Gulf of Mexico and overtake Russia as the world’s leading producer of natural gas, upstream operators’ drilling success hasn’t necessarily translated into financial outperformance.

Robust production from prolific unconventional fields sent North American natural-gas prices spiraling lower, while the no-show winter of 2011-12 increased this oversupply and depressed prices even further in the first half of 2013.

Prices have recovered somewhat in the new year, thanks to robust demand for heating during the frigid 2013-14 winter. However, the price of the commodity has merely recovered to historically depressed levels from ultra-depressed levels.

Looking for arbitrage opportunities, the US oil and gas industry pushed hard for the Dept of Energy to approve increased LNG exports via specialized tankers. A quick glance at the difference between Henry Hub prices and international prices underscores the appeal of US LNG exports to companies on either side of the trade.

In this issue, we survey the push for LNG exports in North America and highlight our favorite plays on this trend, as well as some names to avoid.

The LNG Investment Bible, International Edition

Investors have an enduring love affair with liquefied natural gas (LNG), likely because of the highly publicized political debate over whether the Dept of Energy would approve proposed export schemes to ship US natural gas overseas.

After a prudent period of study, the Obama administration in May 2013 ended the moratorium on approving LNG exports to countries with which the US doesn’t have a free trade agreement--a crucial component for any proposed terminal to move forward.

Meanwhile, investors salivate over the wide spread in commodity prices between North America, which has more than enough production, and Asia, where natural-gas prices track the price of Brent crude oil.

In this issue, we explore the factors driving the supply and demand balance in the near term and over the next five years, while highlighting our favorite plays on the coming boom in Australian LNG projects.

The next issue of Energy & Income Advisor will spotlight our favorite plays on US and Canadian LNG exports--and some stocks to avoid for tactical and fundamental reasons.

 

Trust Exercise

With an average yield of more than 13 percent, US-listed oil and gas royalty trusts can prove irresistible to income-starved investors.

But investors should resist the urge to chase the highest-yielding names; selectivity and a thorough understanding of the trust’s structure and underlying assets are critical to uncovering the best values--and avoiding the riskiest names.

The Yorkville Royalty Trust Universe Index--a capitalization-weighted basket of 28 royalty trusts--has returned 2.4 percent over the past 12 months, lagging the 12.1 percent gain posted by the S&P 500 Energy Index.

Trust-specific factors, not macroeconomic forces, have driven this performance; the top performer in the Yorkville Royalty Trust Universe Index delivered a 57 percent return last year, while the biggest laggard gave up more than 68 percent of its value.

Although income-seeking investors often gravitate toward a buy-and-hold strategy, a valuation-focused approach that seeks to take advantage of market dislocations is essential to outperforming.

Investors must look beyond yield and understand the various drivers for each security, from the duration of hedge books and the sponsor’s drilling obligations to the production mix and regional outlook for hydrocarbon prices.

And the Winners Are…

The holdings in our model Portfolios posted solid fourth-quarter results and have continued to outperform their benchmarks.

Since the MLP Portfolio’s inception on Nov. 15, 2013, our holdings have delivered an average total return of 7.16 percent, compared to the 2.16 percent return generated by the benchmark Alerian MLP Index.

Over this period, the Portfolio’s conservative sleeve has generated an average total return of 8.9 percent, while our aggressive holdings are up 5.3 percent.

In this issue, we share our updated take on these master limited partnerships (MLP) and our analysis of their fourth-quarter results and growth prospects.

Note that we have also updated our comments in the MLP Ratings table for many of the 100 names that we track; we will complete this review over the coming days.

We also review fourth-quarter results from our International Portfolio holdings that have reported earnings since the last issue of Energy & Income Advisor.

  • Live Chat with

    Elliott and Roger on Aug. 1, 2014

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Coverage Universe

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLP Ratings

      Our assessment of every energy-related master limited partnership.

    • International Coverage Universe

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.

    Experts

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Peter Staas

      Managing Editor: Capitalist Times and Energy & Income Advisor