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MLP Mania

By Roger S. Conrad on May. 11, 2014

Editor’s Note: The Energy & Income Advisor team will attend the National Association of Publicly Traded Partnerships’ upcoming MLP Investor Day, an annual event where we’ve uncovered some of our best investment ideas in recent years. Over this grueling two days, we’ll attend presentations from 81 master limited partnerships and talk to management teams during break-out sessions and one-on-one meetings. One of our goals this year is to kick the tires on a few names we’re considering for our MLP Portfolio’s aggressive sleeve. We’ll share our key takeaways from the conference and top ideas with Energy & Income Advisor subscribers in an exclusive webinar on May 22. Sign up for a risk-free trial today.

The biggest day of the year for income investors is just around the corner.

From May 21 to May 22, management teams from 81 master limited partnerships (MLP) will pitch their stories to analysts and investors at the National Association of Publicly Traded Partnerships’ (NAPTP) MLP Investor Day.

As usual, the Energy & Income Advisor team will be there as part of the publication’s commitment to covering every energy-focused MLP; in previous years, the annual conference has helped us to uncover some of our best investment ideas.

After last year’s event, we threw our weight behind the following names, all of which delivered big gains over the ensuing months:

  • Access Midstream Partners LP (NYSE: ACMP)–42.4 Percent Gain
  • Hi-Crush Partners LP (NYSE: HCLP)–96.4 Percent Gain
  • Oiltanking Partners LP (NYSE: OILT)–82.7 Percent Gain

Although our meetings with Enbridge Energy Partners LP’s (NYSE: EEP) management team piqued our interest in the MLP’s turnaround story, the stock has delivered only a 9.2 percent return since last year’s conference.

For quarters, we were Enbridge Energy Partners’ lone booster. But the stock has caught upgrades from analysts at Credit Suisse (Zurich: CSGN, NYSE: CS) and energy-focused Simmons & Company in recent months. As the MLP pushes to return to distribution growth, this turnaround tale should gain additional traction in the coming year.

The opportunity to meet with management teams from our favorite MLPs, and to uncover new investment ideas, makes the NAPTP’s annual investor conference a must-attend event for the Energy & Income Advisor team.

What We Found Last Time

At this year’s conference, 81 management teams will give presentations and host break-out sessions over a two-day period; with such a grueling schedule, we always put together a game plan to avoid information overload and maintain our focus.

By the time the conference rolls around, we’ll have commented on quarterly results for most publicly traded partnerships in Energy & Income Advisor’s MLP Ratings table.

As we pore over 10-Ks and transcripts of quarterly earnings calls, we’re putting together a list of company-specific questions for breakout sessions and one-on-one meetings at the conference.

It also helps to have an idea of what you’re looking for before you enter such deep waters. Last year, for example, we focused on three themes:

  • Undervalued midstream names that faced temporary, and ultimately surmountable, challenges;
  • High-quality MLPs that the market had discounted because they operated nontraditional businesses; and
  • High-flying MLPs that remained undervalued relative to their growth prospects, despite strong gains over the previous 12 months.

Our strategy paid off. Hi-Crush Partners LP, the first publicly traded partnership to specialize in the silica sand used in hydraulic fracturing, delivered huge returns to investors–once the market wrapped its head around the MLP’s growth story.

Oiltanking Partners also posted big gains, thanks to accelerating distribution growth. The MLP owns significant dock space on the Gulf Coast and has reaped the rewards of working with Enterprise Products Partners LP (NYSE: EPD) to build the nation’s largest export terminal for propane and butane.

The partnership earns volume-based throughput fees on these shipments and a share in the margin received on every customer vessels loaded at the Houston Terminal.

In addition to its partnership with the leading US propane exporter, Oiltanking Partners owns significant storage capacity on the Houston Ship Channel and in Beaumont, Texas, and has ample opportunity to expand these facilities to take advantage of robust customer demand.

Finally, Access Midstream Partners boasts leading gas-gathering and -processing footprints in the liquids-rich cores of the Marcellus Shale and Eagle Ford Shale, where pad drilling and simultaneous drilling operations have fueled rapid volume growth on its systems. All this has translated into impressive distribution growth and significant price appreciation.

This year’s NAPTP conference occurs yet another year into the bull market that began in March 2009. The Alerian MLP Index has rallied another 10 percent (not including distributions) and has hit several all-time highs this year.

And on the basis of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), the Alerian MLP Index is almost 40 percent more expensive than it was in 2010. Meanwhile, the index’s distribution yield has reached its lowest level in a long time.

Elevated valuations carry high expectations. If these high flyers miss the mark, significant downside could be in store.

What We’re Looking for This Year

As we pick through quarterly results, we’re assembling a list of potential candidates to add to our MLP Portfolio; we recently booked a 56 percent gain on one holding and are on the hunt for a replacement. Here are some of the themes on our radar as the NAPTP’s annual MLP investor conference approaches.

  • Distribution Cutters: Although nothing sends income-seeking investors heading for the exit like a distribution cut, these selloffs can create a buying opportunity–if the lower payout stabilizes the partnership’s financial situation and management has a plan to return to growth. (See Dividend Cuts: The Best of Times and the Worst of Times.) We look forward to talking to management from one MLP that pays a variable distribution and could be a takeover target. And we’ll also be on the lookout for names at risk of a distribution cut; investors would do well to avoid these stocks. 
  • MLPs with Stalled Distributions: Investors often lose interest in partnerships that go through an extended period without raising their payout–we don’t. At the start of 2013, units of Buckeye Partners LP (NYSE: BPL) yielded more than 9 percent. By the end of the year, the stock had rallied by more than 56 percent, as the MLP returned to regular distribution growth. We’ll be on the prowl for other turnaround stories.
  • Newly Listed MLPs: Partnerships often grow their distributions at an accelerated rate in their first two years as publicly traded entities. These rising quarterly payouts, coupled with a raft of positive research reports from Wall Street analysts, tend to attract investors’ attention and drive the stock price higher. With a few obvious exceptions, last year’s class of initial public offerings has largely underwhelmed. Meeting with management teams could give us more confidence in some of these names.
  • High Growth: As my colleague Elliott Gue observes in Investing in MLPs: Yield vs Distribution Growth, publicly traded partnerships that grow their distributions over time generally deliver superior total returns than those that offer only a high yield. Moreover, taking profits on a MLP that has generated a big chunk of its upside from price appreciation entails less of a tax burden than a position that has generated most of its return through distribution accumulation. We’ll be on the lookout for the partnerships with the best growth prospects that can beat the market’s already lofty expectations.

Knowledge = Profits

After Enterprise Products Partners delivers the conference’s final presentation, we’ll present our key takeaways, favorite investment ideas and names to avoid in an exclusive webinar for Energy & Income Advisor subscribers

Don’t miss out on this treasure trove of information. If history is any guide, we’ll come away from this conference with some of our best picks of the year.

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