Big Dividends from MLPs - Barrons

How to Energize Your Portfolio
By DIMITRA DEFROTIS

Master limited partnerships look inexpensive. And with their double-digit yields, why worry if they don't bounce back right away?

IT MAY TAKE YEARS for the shotgun marriage of Washington and Wall Street to pay off for taxpayers, who are footing the wedding bill. But some partnerships -- master limited partnerships -- are offering double-digit returns today.

MLPs, as they're called, typically invest in energy assets, such as oil fields and natural-gas processors. Most of their profits are passed along to their investors as juicy tax-deferred distributions, and the yields for many now hover near 11%. That rich payout reflects the double whammy that has hit the group -- the recent drubbing of the overall market and the sharp selloff in energy names that had preceded it, as oil prices receded from record levels.



Through Thursday, the Alerian Capital index of MLPs was down 44% this year. The good news is that as MLP prices fall, payouts rise, offering a glorious security blanket in this credit morass. And Citigroup thinks its list of 36 MLPs could produce 12-month total returns of 84%.

INVESTORS DO NEED A selective eye. Some MLPs have sold off because they're highly leveraged, while others have slid because they're directly affected by volatility in commodity prices -- which has been substantial lately. But pipeline owners, flush with income from recurring transport fees, have been unfairly dumped with their brethren.

Says Seth Glickenhaus, chief investment officer at Glickenhaus & Co., a New York money-management firm: "MLPs are getting to levels that are very, very interesting. I think their cash flows are going to continue, and at these prices you are getting very nice yields."

Where could MLPs go from here? "They have lost more than half their value in many cases, and I would say they could go up 25% easily," Glickenhaus ventures.



There has been negative sentiment about MLPs this year as hedge funds unwound energy positions. In addition, Lehman Brothers, which filed for bankruptcy in mid-September, was a lender and adviser to a handful of MLPs. As Lehman and others shed assets, lowering their value, arbitrage plays including MLPs suffered.

Glickenhaus likes three pipeline partnerships: Enterprise Products Partners (ticker: EPD), Energy Transfer Partners (ETP) and Boardwalk Pipeline Partners (BWP). Citigroup thinks the pipeline group can generate total returns of nearly 63% in the next 12 months.

Boardwalk, of Owensboro, Ky. -- which has the lowest ratio of long-term debt to capital among Glickenhaus' picks (38%) -- owns natural-gas storage fields and operates two gas pipelines in the Southeastern U.S.

At its recent quote around 16, Boardwalk looks reasonably priced, at an enterprise value (debt plus equity) of 11 times earnings before interest, taxes, depreciation and amortization -- near the Alerian index's average.

Robust Profit PipelinesBoardwalk's shares have fallen by 48% over the past 12 months; its yield is near 11%. Citigroup expects Boardwalk to produce total returns exceeding 41% over the next year. The partnership's relatively low ratio of long-term debt to capital should serve it well in the current economic environment.

Another outfit with fee-based cash flow, El Paso Pipeline (EPB), offers a 9% yield and should produce 10% compound annual growth in distributions over the next five years, according to Wachovia Capital Markets research. El Paso Pipeline's debt level is reasonable at 54%, and Wachovia thinks the stock is worth almost double its recent price near 13.

One big plus: General partner El Paso Corp. (EP) recently dropped $971 million in pipeline assets into the partnership. A Wachovia report praised the deal, financed via a private debt placement and issuance of new units, saying it "reaffirms EPB's commitment to the MLP business model, and gives management credibility in delivering...to EPB unitholders."

For individual investors averse to filing the tax forms required annually of MLP owners, another option is owning the MLP general partner, says Timothy Call, chief investment officer at the Capital Management Corp., a Richmond, Va., investment-advisory firm. Call thinks that demand for U.S. natural-gas pipelines will increase, boosting returns for interstate operators like those controlled by OneOk Partners (OKS). But Call prefers shares of its general partner, OneOk (OKE), the Tulsa, Okla., natural-gas utility with a large stake in OneOk Partners.

THE BIGGER FISH, OneOk, buys, transports, stores and distributes natural gas. It yields 6.4%, which isn't too shabby, and its shares recently fell to a 52-week low near 26. Despite the gloom in the financial markets, analysts' 2009 earnings estimates are $3.49 a share, giving the stock a price/earnings ratio of just below eight times expected profits.

The Bottom Line

With many MLPs down 40% in the past 12 months, yields have jumped to about 10%. Citigroup sees the average partnership producing a total return of 84% over the next year.Another option: exchange-traded MLP funds. Two trade at a discount to their net asset value. The BearLinx Alerian MLP Select Index (BSR) has a 10% yield. The other, the MLP & Strategic Equity Fund (MTP), which holds a basket of energy MLPs and dabbles in forward contracts, yields near 14%.

Of course, even if the stock market stabilizes, sentiment against MLPs could stay negative if oil and gas prices waver.

But the partnerships mentioned here look inexpensive, generate steady income and offer upside potential even amid fluctuations in oil and natural-gas prices. And the idea of being paid while waiting for the stock to rise should energize some investors.


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