MLPs: Still Time to Step to the Plate

By Roger Conrad • August 30, 2011

The extreme low valuations of early August have mostly vanished. But with only one MLP Profits Portfolio pick trading above its buy target, there’s still time for would-be owners to step up to the plate and capture superb values and high yields.

The lone exception is Magellan Midstream Partners LP (NYSE: MMP), which has surged toward $60 per unit. Investors had a chance to capture this low-risk, high-growth gem, which Elliott Gue reviewed in the Aug. 18 installment of MLPP–as low as $51 per unit early last month before it shot back to current levels.

But don’t feel too badly if you’re not yet a unitholder. The other 17 Portfolio Holdings are off their lows but still well in bargain territory. That includes Kayne Anderson Energy Total Return Fund (NYSE: KYE), which is back to an 8 percent premium to net asset value (NAV) and yields 7.6 percent, paid quarterly.

In this issue I review the rest of the MLPP Portfolio recommendations reporting second-quarter earnings: Conservative Holdings Genesis Energy LP (NYSE: GEL) and Spectra Energy Partners LP (NYSE: SEP) and Growth Holdings DCP Midstream Partners LP (NYSE: DPM), Energy Transfer Partners LP (NYSE: ETP), Inergy LP (NSDQ: NRGY), Targa Resources Partners LP (NYSE: NGLS) and Teekay LNG Partners (NYSE: TGP).

As you’ll see, all reported positive results on three key fronts. The first is distribution coverage, the relevant measure of profits for master limited partnerships (MLP). All posted solid numbers that were well within management’s guidance range, which is ultimately what determines the potential for growing payouts. Second, each of them stayed on course with their plans for future growth via asset construction and acquisitions. And third, all of them enhanced their liquidity, keeping them on course to execute on growth plans as well as fund current operations.

Some of these companies have held up very well in the stock market, despite intense selling of MLPs on some days during the past month. Some, however, didn’t hold up as well and now represent potential deep-value opportunities.

As always, it’s up to the reader to decide what the best selections are for them. Again, Conservative Holdings are almost entirely fee-based businesses and are safe enough for even the most risk-averse. Growth Holdings have some commodity price exposure and their fortunes can therefore be more volatile. That’s particularly true for those making major strategic moves, such as Energy Transfer and Inergy.

Finally, Aggressive Holdings’ cash flows depend heavily on commodity prices. Some, such as Linn Energy LLC (NSDQ: LINE), have basically factored out their exposure in the next several years by aggressively hedging the price of future output of oil and gas. But over the long term their fortunes depend on energy prices, and so will their share prices.

Most investors will probably want to own a mix drawn from all three groups. Some of the fattest yields, for example, are currently in our Growth group. The title of fastest and most reliable dividend growth, meanwhile, currently resides with Conservative Holding Genesis Energy, which is one of our safest recommendations as well.

Whatever you do, make sure you’re basing your decision on the numbers and a fair assessment of the risks involved rather than simply jumping at the biggest yield. And practice portfolio balance as well. Overloading on a single investment may seem to pay off at times. But it will also tie your fortunes to a single company, which can take your whole portfolio down if circumstances turn out less favorable than we expect.

The good news is the MLP Profits machine is still running well. That’s well-positioned MLPs using record-low capital costs to finance development of what’s still a growing stream of high-percentage energy asset building opportunities. And every new project adds cash flow, financing dividend growth and ultimately higher unit prices.

Sometimes the market forces us to defer our gratification, as it did during the mayhem this summer. But sooner or later, adding assets and cash flows builds wealth, even as a rising stream of distribution income pays us to wait around.

Even the cancellation of a proposed joint venture between Enterprise Products Partners LP (NYSE: EPD) and Energy Transfer Partners has a positive side. The pair failed for now to attract adequate commitments for capacity on their proposed 584-mile crude oil pipeline from Cushing, Okla., to Houston. But rather than push ahead with a project that wasn’t 100 percent financially secure, they pulled the plug.

All else equal, not having the project means less cash flow for both MLPs. But they still have the option of moving ahead at a latter date. Meanwhile, Enterprise Products and Energy Transfer have demonstrated they still hold all new projects to tough standards, a solid vote of confidence for their existing pipelines of projects and a clear sign we haven’t entered an era of speculative building as would indicate an ultimate industry top.

Questions and Answers

The table “MLPs, Market Caps and Investment” should answer two additional questions we’ve had from investors recently. First is how vulnerable MLPs are to a potential change in how they’re taxed. The second is whether MLPs are really overvalued in today’s stock market.

The table shows the 50 master limited partnerships in the Alerian MLP Index, representing the largest energy-related MLPs in America. I’ve shown three pieces of data. Starting from the left, the first is market capitalization, or total units outstanding times unit price in billions of dollars. The second is capital spending (CAPEX), excluding acquisitions for fiscal year 2010. The third is the ratio of that system CAPEX to market cap, shown as a percentage.

Adding up the market capitalization of all 50 MLPs yields a total of $225.7 billion roughly. In comparison, the current market cap of Exxon Mobil (NYSE: XOM) alone is $358.9 billion.

My point: The MLP universe–regardless of how much it’s written up in the financial press–is still a fly speck in the greater universe of US stocks.

That’s a stark contrast to where Canadian income trusts were in the Toronto market in 2006 before they were slapped with a tax, when the country’s largest companies like BCE Inc (NYSE: BCE) and Encana Corp (NYSE: ECA) were either in the process of going trust or were threatening to.

And again, unlike in Canada, new taxes can’t be mandated by the executive branch in the US, but must be proposed and approved by Congress.

Anything is possible in Washington these days–no matter how harebrained–as the debt ceiling standoff earlier this summer proved. But as the table shows, any new tax on MLPs wouldn’t raise much cash.

Taking the average 6.26 percent yield on the Alerian MLP Index and multiplying by the total market cap of $225.7 billion, you get total distributions of about $14 billion. Taxing those at the top 15 percent corporate rate would bring the Treasury a grand total of a little over $2 billion.

And that’s before taking out depreciation and all of the other non-cash expenses that reduce Exxon’s income tax bill–for example–to just 6 percent of total revenue and other income.

In other words, anyone who thinks hitting up MLPs for additional taxes is the answer to the federal budget deficit is seriously delusional, or at the very least severely mathematically challenged. And let’s not forget MLPs have friends on both sides of the aisle in Congress as well who have blocked earlier taxation efforts.

Finally, there’s the capital spending MLPs do, as shown in the table. The figures don’t include acquisitions, which is a big part of spending. Taxing MLPs may not raise much money for Uncle Sam. But it would make it lot more difficult for MLPs to raise capital to fund projects needed to get US energy to market.

And that’s directly at odds with the Obama administration’s oft-stated goal of encouraging development of natural gas to boost US energy independence and cut carbon dioxide (CO2) emissions.

We’ll keep you posted as to the latest developments on the taxation front. In the meantime, we invite you to visit the “MLP Guide” section on taxation on the website www.MLPProfits.com. For now, this doesn’t appear an issue worthy of investor worries.

The other question we’ve seen a lot of recently concerns MLP valuations, mainly the charges of some bloggers that they’re chronically overvalued compared with other dividend-paying stocks. This table has an answer to that. That’s the locked-in relationship between rising capital spending and distribution increases for MLPs of all stripes.

And keep in mind that these figures don’t include acquisition spending. Alone among sectors, MLPs’ acquisitions are always accretive to cash flow immediately. That’s in large part because general partners are compensated directly by cash flows and would see their incomes fall otherwise. In contrast, executives in other industries are demonstrably willing to see profits suffer up front if there’s a deal they really want to make.

MLPs also depend on equity markets to permanently finance deals. If a purchase doesn’t immediately convey a benefit, the unit price will suffer and the transaction may no longer be worth pursuing.

As anyone who pokes around statistics long enough finds out, numbers can be bent–or can be found–to make any argument. But if you’re trying to get a true read of risk, reward or valuation, there are right numbers to follow and wrong ones to always ignore.

Any “analysis” that even mentions earnings per share (EPS) as a valuation tool for MLPs is not serious–it should be summarily ignored. That goes for any number based on EPS as well, including the so-called price-over-earnings-growth ratio. MLPs are not corporations. The idiocy of financial accounting means they have to file financials as though they are. But EPS isn’t a valid measure of MLP profits, no way no how.

Rather, the valid number is cash flow. That’s what determines the level of distributions that can be paid as well as how fast future distributions can grow.

Distributions and distribution growth are, in turn, what drive investors to MLPs. Consequently, the only relevant way to measure whether an MLP is overvalued is to compare the unit price to yield and yield growth.

Are MLPs overvalued on this measure? Hardly. The list below adds current yield to annual distribution growth. Rising cash flow begets distribution growth, which in turn leads to unit price growth–i.e. capital gains.

MLPs’ prices move up and down for many reasons. But the yield plus the distribution growth rate gives us an approximate annual projected total return and therefore an appropriate valuation tool that makes far more sense than EPS. Here’s how MLP Profits Portfolio Holdings stack up, based on midday prices Aug. 29 and 12-month dividend growth rates.

Conservative Portfolio

  • Enterprise Products Partners LP (NYSE: EPD)–5.9% yield + 5.2% growth = 11.1% return
  • Genesis Energy LP (NYSE: GEL)–7.2% yield + 10.7% growth = 17.9% return
  • Kinder Morgan Energy Partners LP (NYSE: KMP)–6.7% yield + 5.5% growth = 12.2% return
  • Magellan Midstream Partners LP (NYSE: MMP)–5.3% yield + 7.2% growth = 12.5% return
  • Spectra Energy Partners LP (NYSE: SEP)–6.5% yield + 8.1% growth = 14.6% return
  • Sunoco Logistics Partners LP (NYSE: SXL)–5.8% yield + 6.6% growth = 12.4% return

Growth Portfolio

  • DCP Midstream Partners LP (NYSE: DPM)–6.6% yield + 3.7% growth = 10.3% return
  • Energy Transfer Partners LP (NYSE: ETP)–8% yield + 0% growth = 8% return
  • Inergy LP (NYSE: NRGY)–10.4% yield + 0% growth = 10.4% return
  • Targa Resources Partners LP (NYSE: NGLS)–6.7% yield + 8.1% growth = 14.8% return
  • Teekay LNG Partners LP (NYSE: TGP)–7.6% yield + 5% growth = 12.6% return

Aggressive Portfolio

  • Encore Energy Partners LP (NYSE ENP)–9.4% yield – 6% dividend cut = 3.4% return
  • Legacy Reserves LP (NSDQ: LGCY)–7.9% yield + 3.9% growth = 11.8% return
  • Linn Energy LLC (NSDQ: LINE)–7.3% yield + 9.5% growth = 16.8% return
  • Navios Maritime Partners LP (NYSE: NMM)–11.5% yield + 4.8% growth = 16.3% return
  • Penn Virginia Resource Partners LP (NYSE: PVR)–7.6% yield + 4.3% growth = 11.9% return
  • Regency Energy Partners LP (NYSE: RGP)–7.6% yield + 1.1% growth = 8.7% return

Every single one of the Conservative Holdings has a yield plus 12-month dividend growth rate–projected annual return–greater than 10 percent. So do four of the five Growth Holdings and four of the six Aggressive Holdings.

The worst of these–Encore Energy Partners LP (NYSE: ENP)–is dragged down by a dividend cut but is really a special situation as it’s on the cusp of being acquired by Vanguard Natural Resources LLC (NYSE: VNR). We intend to hold through the deal, at which time we’ll get a company yielding 8.2 percent with 12-month distribution growth of 4.5 percent, for a total annual return of 12.7 percent. Hold Encore Energy Partners through completion of its acquisition by Vanguard Natural Resources.

Outside of that one, the two worst are Energy Transfer Partners and Regency Energy Partners LP (NYSE: RGP), both of which are on the cusp of what should be robust growth. I highlight Energy Transfer’s prospects below.

But even if Energy Transfer doesn’t raise its payout, can anyone with a straight face really call it overvalued at a projected annual return of 8 percent? Or what about Kinder Morgan Energy Partners LP (NYSE: KMP), favorite whipping boy of MLP bears that has combined yield and 12-month dividend growth of 12.4 percent?

You can do anything with statistics. Dividends, however, don’t lie. Companies have to come up with real cash every quarter to pay their shareholders–unitholders in the case of MLPs–not just numbers on a page. And remember, there’s no better guarantee of the safety of a distribution than if it’s just been increased.

If anything, this valuation model is far too conservative for MLPs. For one thing, it doesn’t take into account the fabulous tax advantage they offer, particularly to investors in higher tax brackets. And keep in mind that any MLP with exposure to energy prices is a tapped into what should be a robust environment going forward.

Make no mistake. You’ve got to look at the numbers every quarter to ensure MLPs are still measuring up as businesses, just as you’ve got to do with every stock you own. And no one should have all their money in one sector.

But based on any valid measure of valuation, high-quality MLPs are still selling well below fair value. And as long as you buy below our targets, you’ll be locking be in robust returns for years to come.

The Rest of the Numbers

Here are the remaining second-quarter numbers and analysis to report for MLP Profits Portfolio recommendations, starting with the Conservative Holdings.

Genesis Energy LP (NYSE: GEL) this month completed its previously announced acquisition of the black oil barge transportation business of Florida Marine Transporters. The $141 million purchase further expands this fee-generating business by another 30 barges and 14 push/tow boats, serving the Gulf Coast and other inland systems. And it’s expected to immediately add to the MLP’s cash flow in the second half of 2011.

Genesis generated available cash before reserves of $31.9 million in the second quarter, up 22.2 percent from year-earlier levels. That provided solid distribution coverage of roughly 1.2-to-1, enabling the company to lift the payout at an annualized rate of greater than 10 percent for the 24th consecutive quarter. That’s a record of consecutive robust increases simply unmatched anywhere. And it’s set to continue for the foreseeable future, as the company continues to take advantage of opportunities in niche areas of the petroleum business.

All three of Genesis’ operating segments turned in solid results for the second quarter and first half of 2011. Pipeline Transportation was the star, recording a 48.2 percent jump in its profit, thanks in large part to the acquisition of a 50 percent interest in the Cameron Highway joint venture last November. The company’s Texas pipelines enjoyed a solid boost in throughput, as activity in areas such as the Eagle Ford Shale expanded.

Refinery Services and Supply and Logistics (S&L) divisions were also solid. The former saw a 17.4 percent boost in segment margin, while the latter overcame more difficult industry conditions in the caustic soda market and the impact of Mississippi River flooding with solid cost controls and volume boosts. Overall S&L margin rose 15.7 percent from year earlier levels.

Genesis’ numbers announced its numbers and distribution increase in the teeth of last month’s stock market panic. The ironic result was the unit price actually plunged that day, no doubt triggering even more selling as some assumed there was something wrong at the company. These numbers show clearly, however, that Genesis’ low-risk road to robust growth is still very much intact.

In fact, last week management announced an expansion of its credit agreement, giving the MLP up to $1 billion in additional funds with which to “build long-term value from organic opportunities as well as strategic acquisitions,” in the words of CEO Grant Sims.

The upshot is continued robust growth in cash flow and distributions going forward, even as the units continue to yield a generous 7.3 percent paid quarterly. Genesis Energy LP is a strong buy up to 28.

Spectra Energy Partners LP (NYSE: SEP) units have also taken a hit over the past month, despite the MLP posting solid second-quarter results as well as another robust distribution increase. Cash available for distribution–management’s primary measure of profitability–ticked up 6 percent, despite one-time costs for completing the acquisition of the Big Sandy Pipeline. The distribution, meanwhile, was increased for the 15th consecutive quarter, and now stands 8.1 percent above year-earlier levels.

The lion’s share of Spectra’s cash flow is now tied to income from major pipeline systems. And with parent Spectra Energy (NYSE: SE) spending more than $1 billion a year on such infrastructure, its path to future growth is clearly to increase such interests. That suggests extremely reliable and steady cash flow growth going forward, with the likely offset of slower distribution growth than we’ve seen thus far in the company’s four-year history.

That reality, however, appears to be more than reflected in Spectra’s unit price, which has come down from what we viewed as overvalued in the mid-30s to a much more reasonable high 20s-low 30s valuation range. Moreover, the MLP has attained an investment-grade credit rating (BBB), one of the few in the group to hold one. That’s a plus for low-cost financing of future pipeline expansions and acquisitions.

All of the MLP’s pipelines are enjoying a brisk business as, in many cases, the only game in town for large energy players. The Big Sandy purchase is now fully funded, with additional capacity expended to begin producing revenue at the first of next year.

Over the past four years, Spectra has boosted its pipeline miles by more than 50 percent, roughly in line with the 55 percent growth in its quarterly distribution. That’s a dual trajectory for growth that shows no signs of fraying. Now yielding more than 6.5 percent, Spectra Energy Partners is a solid buy for even the most conservative investors, all the way up to 33.

Our Growth Holdings combine a mix of fee-based cash flow with more commodity price-sensitive businesses. The result is cash flow and distribution growth that’s slower but more reliable than our Aggressive Holdings, less reliable but with higher potential than our Conservative Holdings.

Not surprisingly, these MLPs’ unit prices have generally been more volatile than the Conservative Holdings over the past month. In fact, several are now trading 25 to 30 percent below their highs of earlier this year.

The good news is second-quarter numbers for each of them are still quite solid. Current distributions are supported comfortably, and there’s potential for strong future growth as growth plans materialize. In fact, several of these MLPs reported distribution increases simultaneously with operating results.

DCP Midstream Partners LP (NYSE: DPM) was one of these, lifting its quarterly payout to 63.25 cents per unit a week before releasing numbers. That’s the MLP’s third consecutive quarterly boost, lifting the payout 3.7 percent above last year’s levels.

As for the second-quarter numbers, they were right in line with management’s forecast, as was progress in constructing new assets. Distributable cash flow (DCF) surged 56.6 percent, and first-half DCF covered the payout by a solid 1.3-to-1 ratio.

Natural gas liquids (NGLs) are the cornerstone of DCP’s growth strategy, a major reason we’ve continued to recommend this MLP. Natural Gas Services segment cash flow surged 22.2 percent in the quarter, reflecting both increased throughput volumes for NGLs in its system and improved pricing. The company also benefitted from the settlement of a dispute that should unlock future income.

Wholesale Propane Logistics isn’t typically a profit center in the second quarter, as heating demand slackens. Nonetheless, DCP did swing to positive cash flow in this segment, thanks mostly to its acquisition of a propane terminal, which boosted the fee-based income from this business. Finally, NGL Logistics cash flow rose more than five-fold from year-earlier levels, reflecting several acquisitions including a storage facility, a pipeline and fractionators devoted to NGLs.

It’s this business that seems likely to power DCP going forward, particularly given the plans of its general partner’s joint owners, Spectra Energy (NYSE: SE) and soon-to-split-up ConocoPhillips (NYSE: COP). DCP is well positioned in the Eagle Ford Shale, where it recently announced a major investment that should start bearing fruit next year. Meanwhile, second-half results will get a lift from the completion of the Wattenberg pipeline expansion and startup of other NGLs assets and expansions.

Despite the MLP’s hefty capital needs for growth, management is sticking to a full-year distribution growth target of 5 percent. That goal was affirmed by CFO Angela Minas during DCP’s second-quarter conference call. And it’s a rate the MLP should be able to maintain the next several years, on top of a current dividend of about 6.7 percent. DCP Midstream Partners remains a buy up to 40 for those who don’t already own it.

Energy Transfer Partners LP (NYSE: ETP) has dropped from a prior trading range in the mid-50s to a new one in the mid-40s, where it now yields well over 8 percent. That price appears to reflect a perception among investors that the MLP has decided to pump cash into further expansion rather than a promised distribution increase as well as a fear of future dilution from the planned purchase of half the Citrus Pipeline.

Second-quarter results were solid for the owner of midstream energy infrastructure and operator of one of the nation’s largest propane distribution networks. Distributable cash flow (DCF) came in 11.7 percent above last year’s level, reversing a first-quarter shortfall that was due to one-time factors.

The two major pipeline systems completed last December–Tiger and Fayetteville Express–were major contributors for the first time. So were natural gas liquids (NGLs) assets now operated in a joint venture with affiliated MLP and Aggressive Holding Regency Energy Partners LP (NYSE: RGP). The venture plans a rapid expansion of these NGLs assets, as it taps into the development of the Eagle Ford Shale.

It’s the rising cash flow from these assets that management expects to use to fund a distribution increase later this year, as CFO Martin Salinas confirmed during Energy Transfer’s second-quarter conference call. Following through on those plans later this year would likely go a long way to assuage what appears to be growing investor skepticism about the MLP’s growth plans. So would closure on the Citrus Pipeline deal, though this may not happen until next year.

Williams Companies (NYSE: WMB) continues to contest the purchase of Southern Union (NYSE: SUG) by Energy Transfer’s general partner, Energy Transfer Equity LP (NYSE: ETE). Williams currently has an all-cash offer for Southern of $44 per share, versus Energy Transfer Equity’s offer of $44.25 per share to be paid in cash and partnership units.

At this point Southern Union’s management is sticking with Energy Transfer Equity’s as the “superior bid,” and unless Williams offers more it will probably support it when shareholders vote later this year. That’s no guarantee, of course, that they won’t change their mind if Williams raises its bid. As things stand now, however, Energy Transfer Partners is set to purchase Southern Union’s 50 percent stake in the Citrus Pipeline for roughly $1.9 billion as an “asset dropdown” from its general partner (GP).

The GP will forgo $55 million annually of incentive distribution rights (IDR) related to Citrus for four years. That ensures this very steady and growing asset will be solidly accretive for Energy Transfer Partners going forward, even as it continues to tilt overall cash flows further toward reliable fee-based businesses.

The primary concern of some investors concerns the equity and debt issues that will be needed to permanently finance the $1.9 billion purchase price as well as to absorb $1.4 billion in Citrus-related borrowings. Considering Energy Transfer has no maturing issues in 2011 and a 10-year note with a yield-to-maturity of just 4.8 percent, the debt side of the equation wouldn’t be a problem if the deal were completed now.

The dip in the MLP’s unit price, however, suggests some real fear about dilution on the equity side, despite management’s assurances that cash flow from Citrus will be strongly accretive. The good news is at a yield of over 8 percent, Energy Transfer Partners is pricing in whatever dilution risk there is and a lot more.

Our longstanding buy target of 55 may not be revisited until the Citrus deal is done and permanently financed. But with the MLP’s growth plans advancing rapidly and management pledging a dividend increase, the risk-reward balance is clearly stacked in favor of buyers. Buy Energy Transfer Partners up to 55 if you haven’t yet.

Inergy LP (NYSE: NRGY) units have also been driven sharply lower since late spring, slipping from a range of around $40 to a new one in the mid-to-upper 20s. The primary reasons appear to be a lack of recent dividend growth and concerns about the possible impact on cash flow that a planned initial public offering (IPO) of natural gas midstream/storage assets would have.

The deal, if successful, would effectively separate the old core propane distribution operation–the fourth-largest in the US–from the more newly acquired midstream assets. The latter have a focus on natural gas liquids (NGLs), making them attractive for growth as well as a potential acquisition by a larger player. The propane operation, meanwhile, continues to grow by acquiring smaller players in what’s still a very diffuse industry.

The IPO–which will list with the anticipated New York Stock Exchange symbol “NRGM”–is at management’s discretion and would not be launched unless its capital raising goals will be reached. The target appears to be roughly $300 million, with proceeds to be used to cut debt. That would, in turn, be accretive for unitholders. But until a deal is actually in hand, investors are likely to continue viewing the transaction as speculative, and the result will be a negative overhang on Inergy LP units.

Also, until this deal is done investors shouldn’t expect distribution growth at Inergy. That, however, is also due to management’s focus on acquisitions since the limited partnership absorbed the general partner. The largest of these is the purchase of the Seneca Lake natural gas storage facility in New York along with related pipelines. Seneca Lake is a major part of the assets to be IPOed.

Meanwhile, the health of the assets that will generate the cash flow for distributions is solid, both in the midstream and propane business. Propane distribution typically goes fallow in the spring and summer because there’s far less demand for heating. The seasonal nature of this business is why the company’s fiscal year begins Oct. 1 and why Inergy has historically generated all of its cash flow in the October though March half of its fiscal year.

As a result, propane generated relatively little income during the most recent quarter. Nine-month cash flow, however, was up 14 percent, on solid results in propane as well as midstream asset expansion. Cost controls and acquisitions offset a drop in weather-related demand, pushing up propane unit cash flow for the fiscal year so far. Base propane field operating expenses were cut $10 million in the first nine months of fiscal 2011 versus year-earlier levels.

Midstream gross profit, meanwhile, surged 37 percent. That was mainly due to the Tres Palacios asset acquisition. It was less of a contribution than management had expected, owing to absorption costs, and the spun out company will be challenged to bring those results up to projections. Nonetheless, that appears to be well in progress, judging from statements made during the quarterly conference call. And other expansion projects in that business also appear to be on track.

Distributable cash flow (DCF), meanwhile, rose 39.3 percent for the April-through-June quarter and 8.5 percent for the past nine months. As the midstream spinoff is also slated to be organized as an MLP, it will likely pay a portion of Inergy’s current distribution, with the rest paid by the propane arm to keep current unitholders whole.

However they’re divided, there should be enough cash flow to support the current distribution rate from Inergy’s current operations. And that’s certainly not reflected in the yield of well over 10 percent, which is clearly pricing in a dividend cut of up to a third, judging from yields paid by other propane distributors.

Inergy does have more uncertainties than our other MLP Profits Portfolio holdings–and we’re by no means fans of really loading up on a single company. But for those who don’t already own Inergy, now’s a good time to pick up some units.

Targa Resources Partners LP (NYSE: NGLS) has fared somewhat better than Inergy LP (NYSE: NRGY), largely holding its own in the summer selloff. And its units continue to trade within 10 percent of the all-time high it reached in early July.

One reason for the greater strength: Five consecutive quarters of distribution growth that have left the current payout 8.1 percent above last year’s level. Moreover, robust second-quarter distributable cash flow (DCF) covered the distribution by nearly 1.6-to-1, as strong drilling and production activity lifted results at its gathering and processing segment and the logistics and marketing division saw strong pricing and volumes, particularly in the natural gas liquids business.

Management continued to execute on acquisitions, including the drop-down of an energy terminal from its parent. And it also successfully expanded a natural gas liquids (NGLs) fractionator facility both on schedule and under budget, boosting its share of steady, fee-based income.

Gross margin rose 38 percent from year earlier levels, reflecting both successful asset expansion and strong performance from existing operations as well. And with more expansion on track and pricing levels steady, the MLP looks on track for similar growth in the second half of the year. Targa has also hedged commodity price exposure on 75 percent of expected remaining volumes of natural gas for 2011, as well as 80 percent of NGLs and condensate volumes.

That should pretty much lock in margins and growth, particularly coupled with some $268 million in planned capital spending (CAPEX) for growth–excluding maintenance CAPEX–for all of 2011. Management has lifted anticipated CAPEX as opportunities have arisen and the operating environment improved.

The current yield of less than 7 percent is a good indication the market has come to appreciate the MLP’s strengths and ability to grow. But as long as it trades below our target of 35, Targa Resources Partners is a solid buy for new investors.

Teekay LNG Partners LP (NYSE: TGP) took a hit over the summer, as did most companies involved in the transporter/tanker industry. That’s not surprising given worries about a possible global slide into recession and the well-known fact that ships are in abundant supply.

Like Navios Maritime Partners LP (NYSE: NMM), however, Teekay is no ordinary tanker. That’s demonstrated by the 5 percent growth in its distribution over the past 12 months, the result of successfully adding new assets and operating existing ones profitably despite a weak industry environment.

Like Navios, Teekay’s strategy is to build on its portfolio of mostly newer vessels and to lock users into long-term contracts. That provides solid protection against what can be volatile day-rates and ensures there will always be a market for its assets. For example, the company took delivery of two vessels during the quarter under a 15-year charter.

Second-quarter distributable cash flow (DCF) ticked up 4 percent over last year’s levels. That was the result of the purchase of a 50 percent interest in a pair of liquefied natural gas (LNG) carriers last year, offset by the sale of a liquefied petroleum gas carrier and more scheduled dry dockings.

Looking ahead to the second half of 2011, cash flow will get a lift from two vessels mentioned above, as well as a 33 percent interest in four LNG carriers set to enter service. These purchases are all now fully financed, and the company has more than $550 million in available liquidity to fund more purchases. Teekay’s current fleet now consists of 31 delivered vessels with 6 more committed.

The current yield of around 7.6 percent is nearly 4 percentage points below that of Navios. That reflects the more robust dividend growth rate, as well as the better health of Teekay’s niche market versus the dry bulk market. Nonetheless, the MLP now trades well below our long-standing buy target of 41, making now a good time to pick up shares of this high quality outfit.

Earnings at a Click

Here’s where to find a complete wrap-up of second-quarter numbers of MLP Profits Portfolio Holdings, including the seven highlighted above. To go to the proper article, simply click on the link or locate the article in the Archive at www.MLPProfits.com.

Conservative Holdings

Growth Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account