The Energy & Income Advisor team is at the MLP Association’s annual investor conference, where we’ll have access to management teams from 64 master limited partnerships (MLP) over three days of presentations and break-out sessions. As in past years, conversations with portfolio managers and other analysts will be equally insightful.
We’ll distill our top takeaways and best investment ideas in an exclusive report for Energy & Income Advisor subscribers. Not a subscriber? Sign up today to guarantee access to this valuable report.
Last year, we highlighted seven picks for conservative investors that outperformed the Alerian MLP Index by a 3-to-1 margin over the subsequent 12 months. Our three aggressive stocks quadrupled the benchmark’s total return over this period.
Only one of our picks from last year’s conference traded lower: NGL Energy Partners LP’s (NYSE: NGL) reduced its full-year guidance and opted to delay increasing its quarterly distribution until 2018. Wary of NGL Energy Partners’ valuation after the market caught on to its turnaround story, we rated the stock a Hold, with an eye toward establishing a position on dip.
Meanwhile, four of our nine buy-rated stocks generated total returns of more than 30 percent, easily outstripping the Alerian MLP Index’s less than 6 percent gain. Our nine picks from last year also increased their quarterly distributions by an average of 11.4 percent.
Ferrellgas Partners LP (NYSE: FGP), which we warned investors to avoid, gave up more than 70 percent of its value after the propane distributor’s poorly timed (and priced) purchase of marginal midstream assets predictably blew up.
We hope that this year’s report—scheduled for publication on June 5—will give Energy & Income Advisor readers a similar edge. With much of the easy money already made after the early 2016 recovery rally in MLPs, selection will be even more critical to delivering differentiated returns. Here are a few of the opportunities we’ll look out for at this year’s conference.
Objective No. 1: Sorting High-Yield Opportunities from the Endangered Dividends
When oil still fetched more than $100 per barrel, investors and management teams didn’t need to work as hard to make money in the energy sector. But with oil and gas prices likely to remain lower for longer and competition for market share intensifying, the best-capitalized companies with assets in the lowest-cost basins will thrive—and so will investors who buy at the right prices.
Midstream heavyweight Energy Transfer Partners LP (NYSE: ETP) has amassed a sprawling asset portfolio that include significant exposure to the Permian Basin, an area that we expect to take market share in an environment where energy prices remain lower for longer. However, the leverage taken on over the course of this empire building and weakness in noncore businesses resulted in a takeover (bailout offer) from Sunoco Logistics Partners LP that involved a distribution cut of about 28 percent.
Although many MLPs have taken the necessary measures to put themselves on a sustainable path, there could be more pain to come for some names that took only half-steps and continue to contend with weakness in their underlying businesses and/or crippling debt loads. The sweet yields on these stocks could have sour consequences for uninformed investors.
But the high-yield set also includes opportunities for outperformance. Last year, we zeroed in on USD Partners LP (NYSE: USDP) as one of our aggressive picks, intrigued by its undemanding valuation and near-term growth prospects. The stock posted a total return of almost 60 percent over the past year. We’ll be on the lookout for misunderstood high-yielders once again this year.
Objective No. 2: Gauging Inventor Sentiment
Attendance at the MLP Association’s annual investor conference serves as a quick proxy for investor sentiment. Crowds peaked with the energy sector’s top in 2014 and have thinned out in recent years, with generalist portfolio managers and energy tourists moving on to different pastures.
This year, the number of presenters has increased from year-ago levels but remains off the peak. These trends provide important insight into institutional investors’ appetite for MLP exposure, a key indication of the market’s ability to absorb equity issuance.
Objective No. 3: Making New Friends
Over the years, the conference has given us the opportunity to size up management teams from newly minted MLPs or those that operate businesses that are off the beaten path. In 2016, we highlighted PennTex Midstream Partners LP (NSDQ: PTXP) as an undervalued name with decent growth prospects and appeal as a potential takeover target.
The MLP increased its distribution by 7.3 percent over the ensuing 12 months and recently received a takeover offer from Energy Transfer Partners, propelling our total return to more than 35 percent. Once again, we’ll be on the hunt for potential takeover targets that can still create value for unitholders if they remain independent.
Over the past 18 months, a number of prominent MLPs have pursued roll-up transactions, with general partners buying out the limited partner. These deals can unlock value for unitholders by eliminating burdensome incentive distribution rights and shoring up the balance sheet. That said, longtime unitholders can face a significant tax bill.
Whereas ONEOK’s (NYSE: OKE) all-stock purchase of ONEOK Partners LP (NYSE: OKS) looks like a good bit of business for investors in both companies and should set the stage for a return to dividend growth, Midcoast Energy Partners LP’s (NYSE: MEP) unitholders received only a pittance from Enbridge’s (TSX: ENB, NYSE: ENB) takeover offer.
In the past, we’ve called the MLP Association’s conference the most important event of the year for income-seeking investors—that figures to be doubly true this year. Over the past 12 months, the difference between the top and bottom performers in the Alerian MLP Infrastructure Index amounted to about 60 percentage points.
Capturing this upside requires on-the-ground intelligence, which is why we attend the MLPA Association’s annual investor conference every year. Don’t miss out on our key takeaways and best ideas from the 2017 installment–sign up for a risk-free trial of Energy & Income Advisor today!
Elliott and Roger on Jun. 30, 2020
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