In Defense of MLPs For 2012 (EPD, KMP, MWE, PAA, WPZ, MMP, BPL, EPB, KYN, AML, AMLP)

With many Master Limited Partnerships (MLPs) trading at or even above some of their expected target prices, we wanted to take a year-end look into the sector to see where there is opportunity versus risk.  Fitch Ratings has issued a report calling MLPs as being fairly well positioned against economic regulatory risks and has noted that the sector should generate stable operating performance and financial credit measures for 2012.  It noted that these should remain consistent with recent past performance and the outlook includes natural gas pipelines as well as crude oil and refined products pipelines.  With so many retail and income-oriented investors treating this sector’s payouts as dividends (actually distributions of income and capital), we wanted to look at our universe again.

We have overlaid some of the Fitch Ratings analysis after the individual MLPs because we wanted to show you what the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB). 

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $40 billion now and trades at $46.10, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.3%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.1 billion and trades at $78.50, above its consensus target of $76.11 and against a 52-week range of $63.42 to $79.34.  The implied distribution per year based on the last payout was 5.9%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.7 billion.  This unit trades at $55.80, and is under the consensus target of $58.38 and it has a 52-week range of $39.00 to $56.40.  The implied distribution per year based on the last payout was 5.3%.

Plains All American Pipeline, L.P. (NYSE: PAA) is valued at $10 billion, and its $67.30 price compares against a price target of $71.96 and its 52-week trading range is $54.90 to $67.74.  The implied distribution per year based on the last payout was 5.9%.

Williams Partners L.P. (NYSE: WPZ) is worth some $17.3 billion and its $59.65 price compares to a target of $60.81 and a 52-week range of $44.81 to $61.22.  The implied distribution per year based on the last payout was about 5%.

Magellan Midstream Partners, L.P. (NYSE: MMP) is worth $7.35 billion and its $6.30 price is just under the $66.64 consensus price target.  Its 52-week range is $51.00 to $65.92. The implied distribution per year based on the last payout was only about 4.9%.

Buckeye Partners, L.P. (NYSE: BPL) is valued at $5.95 billion and its $63.98 price is pretty far under the consensus price target of $70.25.  It has a 52-week range of $54.51 to $68.92. The implied distribution per year based on the last payout was 6.5%.

El Paso Pipeline Partners, L.P. (NYSE: EPB) is valued at $6.7 billion with a $32.60 share price.  That is one of the largest discounts to the consensus price targets of peers as its target is $39.00.  Its 52-week range is $31.34 to $38.36. The implied distribution per year based on the last payout was 6.1% based on today’s price.

Because many of the largest MLPs are so close to or above the consensus price targets, we recently gave the 24/7 Wall St. Model Dividend Portfolio some changes to focus more on the funds and ETFs (with payout rates based upon the average of the last two payouts): Kayne Anderson MLP Investment Company (NYSE: KYN) with a distribution of about 6.9%; JPMorgan Alerian MLP Index ETN (NYSE: AMJ) with a distribution of about 5.2%; and ALPS Alerian MLP ETF (NYSE: AMLP) with a distribution of about 6.3%.

Some key observances by Fitch in its broad sector call:

• Crude oil and refined products pipelines should have increases in throughput volumes and are expected to benefit from the FERC’s inflation adjusted tariff index.
• Expects North American gas prices to remain low in 2012 on production of lower cost shale gas and the record high levels of gas in storage heading into the winter heating season.
• Low prices could prompt increased demand due to coal-to-gas switching for power generation…
• A modest increase in demand for refined products.
• Shifts in production towards emerging unconventional production basins and liquids-rich plays will drive industry growth…
• For midstream service companies, commodity price sensitivity is a key credit consideration in 2012.

Fitch does view recontracting risk in the longer term as a concern for natural gas pipelines and MLPs and believes that new supply could displace traditional supply and affect capacity utilization.

Perhaps this is the largest consideration of all… Fitch does not believe that a double-dip recession or increased environmental and regulatory costs will materially impact credit quality for natural gas pipelines. It went on to note, “Cash flow and earnings stability provided by long-term capacity reservation contracts will mean stable credit quality across the sector over the next several years.”

Crude oil and refined product pipelines were put in a different boat since these would see lower volumes in another recession.  If this were to occur, it could impact credit quality but only if throughput declines were significant.

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24/7 Wall St. has recently included the MLP sector exchange-traded products and closed-end funds in its 2012 Model Dividend Portfolio since too many of the MLPs are close to or above their price target objectives.  That report includes our top dividend dividend picks for water, conglomerates, REITs, retail, and even high-yield bonds and trust preferred securities.  The 2012 Model Dividend Portfolio is available for anyone who signs up for our free email list in the box below.

JON C. OGG