Dividend (Distribution) Investors Need to Watch for More MLP Secondary Offerings (KYN, EPD, KMR, PAA, AMJ, AMLP)

Kayne Anderson MLP Investment Company (NYSE: KYN) is a closed-end investment fund that invests exclusively in the realm of Master Limited Partnerships with the focus almost being entirely in various aspects of the oil and gas infrastructure sector. With total investments of $4.23 billion and net assets of $2.36 billion as of July 31, it is also one of the top investment vehicles for investors to invest into the field of MLPs.

There is a small warning or word of caution for investors now in the field of MLPs. The fund management group has announced that it has commenced a public offering of 5,000,000 shares of its common stock and the offering could be 5.75 million shares if the overallotment option is exercised. Citigroup, BofA Merrill Lynch, Morgan Stanley, UBS Investment Bank, and Wells Fargo Securities will be the joint book-running managers.

The offering’s net proceeds from the offering will be used to make additional portfolio investments and for general corporate purposes. So, why is this a warning? The last time this fund had a secondary offering it was followed by weaker prices before it stabilized. MLPs have grown and grown over the last few years, both in price and in the number of shares (actually units). This makes the entities larger and larger with more and more holders to answer to. Unfortunately, the payout growth has just come to be expected to by the holders and these MLPs have steadily raised their payouts through time.

There are some investors who believe that the individual MLPs selling more and more units in the secondary market are partly to keep funding those higher and higher payouts. At issue is that these payouts to holders are like dividends, but they are part income and partly classified for tax purposes as a return of capital rather than just all counted as income.

Kayne Anderson is perhaps one of the best outside managers of funds geared toward MLPs and to oil and gas investing. If they are selling more shares it is likely a signal that many of the top MLPs are going to be conducting another round of secondary offerings soon. It could also signal that more new MLPs are going to try to come public via initial public offerings. Either way, the conclusion would be that it is going to take a lot more new money to be thrown at MLPs for the existing players to maintain their existing weight in the pool.

These are the top three investments in the Kayne Anderson fund:

• Enterprise Products Partners L.P. (NYSE: EPD) with close to a $47 billion market cap and with some 9.4% of the fund’s assets in it.
• Kinder Morgan Management, LLC (NYSE: KMR) with a $7.7 billion market cap and with some 7.4% of the fund’s assets in it.
• Plains All American Pipeline, L.P. (NYSE: PAA) with close to a $14 billion market cap and with some 7.1% of the fund’s assets in it.

Again, the team at Kayne Anderson is one of the best teams out there when it comes to MLPs. They also know most of the key players in the MLP sector. If they are issuing 5 million more shares to raise another $150 million in investing capital then chances are high that it is bracing for a new round of secondary offerings or primary offerings in MLPs. In the worst case scenario, we would say that this may be to accommodate more and more of those investors who are busy chasing dividends in the dividend bubble we have been talking about for the last two or three weeks.

We would also watch JPMorgan Alerian MLP Index ETN (NYSEMKT: AMJ) with its $4.4 billion or so in market value as well as ALPS Alerian MLP ETF (NYSEMKT: AMLP) with its $3.4 billion or so in market value. If the key players are going to be issuing new units or if more IPOs in MLPs are going to further crowd the field, they will see the same sort of hit.

JON C. OGG