This is an interesting point in time for the sector of Master Limited Partnerships (MLPs).  The oil and gas business could greatly unlock much of the domestic unemployment woes (and the trade balance) if the United States will develop even the hint of an energy policy.  The allure of MLP distributions is continuing to attract investors who would otherwise be investing in Treasuries, bonds, CDs, and other dividend or income strategies.  Our take is that MLPs have not even reached half of their potential over the next decade, and as such we have given MLPs a place in the 24/7 Wall St. 2012 Model Dividend Portfolio.

We overlaid some of the recent Fitch Ratings analysis after the individual MLPs.  The aim is to show how 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).

As the end of 2012 approaches rapidly, we wanted to take a year-end look into the sector to see where there is opportunity versus risk.  We have shown the basic fundamentals of some of our top go-to names in the MLP sector and have shown a chart of the key ETF in this sector.  A report from Fitch Ratings earlier this month called MLPs fairly well positioned against economic regulatory risks and has noted that the sector should generate stable operating performance and financial credit measures for 2012.  The belief was 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. 

Income and dividend investors have become more aggressively interested in MLPs after a couple of years of Treasury rates and CD rates not paying anything of substance any more for income.  Retirees need cash flow from their investments in order to live.  Even though these distributions paid to investors act as dividends, there is usually a mixed combination of income and a return of capital.  In short, not all of the distributions paid out are treated the same by the tax-man.

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

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $39.2 billion now and trades at $45.00, 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 5.5%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.9 billion and trades at $81.00, above its consensus target of $76.11 and against a prior 52-week range of $63.42 to $80.52.  The implied distribution per year based on the last payout was 5.8%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.6 billion.  This unit trades at $54.20, and is under the consensus target of $61.88 and it has a 52-week range of $39.00 to $56.82.  The implied distribution per year based on the last payout was 5.4%.

Plains All American Pipeline, L.P. (NYSE: PAA) is valued at $10.5 billion, and its $70.32 price compares against a price target of $72.08 and its 52-week trading range is $54.90 to $70.16.  The implied distribution per year based on the last payout was 5.7%.

Williams Partners L.P. (NYSE: WPZ) is worth some $17.4 billion and its $59.98 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 5.2%.

Magellan Midstream Partners, L.P. (NYSE: MMP) is worth $7.4 billion and its $65.70 price is just under the $66.64 consensus price target.  Its 52-week range is $51.00 to $66.12. The implied distribution per year based on the last payout was only about 4.9%.

Buckeye Partners, L.P. (NYSE: BPL) is valued at $5.9 billion and its $63.30 price is pretty far under the consensus price target of $70.44.  It has a 52-week range of $54.51 to $68.92. The implied distribution per year based on the last payout was 6.6%.

El Paso Pipeline Partners, L.P. (NYSE: EPB) is valued at $6.9 billion with a $33.45 share price.  This remains as one of the largest discounts to the consensus price targets with a target price of $39.00.  Its 52-week range is $31.34 to $38.36. The implied distribution per year based on the last payout was 5.9% 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.  The Kayne Anderson MLP Investment Company (NYSE: KYN) employs some leverage with a distribution of about 6.9%.  The JPMorgan Alerian MLP Index ETN (NYSE: AMJ) is a non-leveraged ETF with a distribution of about 5.2%, and ALPS Alerian MLP ETF (NYSE: AMLP) has a distribution of about 6.3%.

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If you want a review of the chart analysis, we included charts from stockcharts.com on the JPMorgan Alerian MLP Index ETN (NYSE: AMJ) and then on the Kayne Anderson MLP Investment Company (NYSE: KYN) below.  If the prices of these instruments improves any further, the chartists and technicians are going to be calling for a sector break-out possibly to challenge highs seen earlier in the year.  As long as Bernanke’s promise of keeping interest rates extremely low for at least another year and a half then it seems like investors will chase this sector around for another three to six months.

As a final reminder, the 2012 presidential and congressional election can have a big impact on this sector.  The MLP sector is a realm where “the one-percenters” are invested in much more than the common worker.  Issues from taxation, an energy policy, a refocus of alternative energy paid for by penalizing oil and gas outfits, and then just ongoing rhetoric could all impact the future of the sector.  For now, it seems like a chart breakout could be forming.

JON C. OGG

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