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It’s Complicated: A Midstream Value Play

By Peter Staas on Oct. 12, 2012

As pass-through entities that disburse the majority of their cash flow to their investors, publicly traded partnerships rely on the debt and equity markets to fund growth projects or acquisitions. For example, blue-chip midstream MLP Enterprise Products Partners LP (NYSE: EPD) has placed seven equity offerings since July 2008, raising $2.45 billion in capital.

In many instances, these secondary issues give savvy investors an opportunity to purchase units of their favorite MLPs at a slight discount; the market’s knee-jerk reaction to this ostensibly dilutive move is to sell the stock.

However, these equity issues often enable an MLP to pursue expansion projects and asset acquisitions that will enable the firm to grow its cash flow and quarterly distribution–a prospect that outweighs any short-term dilution. To return to our example, Enterprise Products Partners has grown its quarterly payout by 19.2 percent since July 2008.

Investors’ patience with Energy Transfer Partners has thinned in recent quarters, with the stock appreciating only 1.5 percent and returning a total of 26.8 percent over the past three years. In contrast, the Alerian MLP Index has rallied 59.8 percent and generated a total return of 93.3 percent over the same period.

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