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  • factoids2002 factoids2002 Nov 22, 2009 9:23 AM Flag

    Diversification

    EPD unit holder Gary asked "what other MLP's would you suggest to maintain diversity?"
    Hachi05man suggested MMP and PAA.
    Sinfuel suggested NS, OKS, PAA and DEP.

    Given that EPD already owns a big block of DEP - one could find fault with DEP as a 'diversifying' investment. All the other 'suggested' MLPs are fellow large-cap, non-E&P, non-propane, non-coal, non-marine transport, non-G&P and non-GP partnerships. If one's goal is diversification, then one needs to invest in companies that are NOT like EPD. And post TPP-merger, adding a crude or refined product MLP to the mix fails to gain one much diversity.

    So [1] you are not going to get much sector diversity adding one or two new investments to EPD. And [2] even adding diversity within MLPs is not going to add a lot of diversity to you overall portfolio when it comes to total returns. But changing your asset allocation so that MLPs are a higher percentage of you portfolio - THAT will probably change those returns - and probably [at least over the near term] improve those returns via their high yields and fairly visible distribution growth.

    So . . IMHO, if you want to diversify, then you need to add exposure to propane, coal, the GPs and the G&Ps.
    [1] Add MMP - and MLP with no IDRs that already had a superior history of distribution growth before that adjustment
    [2] Add two small cap midstream MLPs. I would suggest BWP and newbie EPB, but GEL and SEP are also very good suggestions.
    [3] Add two gathering and processing [G&P] MLPs. I would suggest MWE [Marcellus] and RGNC [Haynesville]. But KGS and NGLS are also good suggestions.
    [4] Add two general partners [GPs]. To get diversity, I would suggest coal GP NRGP. Given that you already own EPD, EPE would not add diversity. So that leaves BGH, ETE and NSH as good suggestions.
    [5] Add one exploration and production [E&P] companies. Going by past distribution history, I would suggest EVEP, LGCY, or LINE

    This recipe calls for a total of nine MLPs. Cutting the recipe down to get to five [one from each sub-sector] would mean buying only one G&P - and I would want to spread the risk [and the opportunity] between two. Cutting the recipe to five would imply still buying one E&P - and [being conservative - or maybe just not feeling that comfortable with the E&Ps] I would not want that high a weighting in E&Ps. And cutting the recipe to five would nudge me to buy coal GP NRGP for diversity - and while NRGP has had great distribution growth, I still would not want a 20% weighting in coal - a commodity that I can not see as having the brightest of futures.

    I believe that the tax complications caused by the K-1's keeps lots of investors away from MLPs. And the UBTIs keeps MLPs being held by several different types of institutional investors. Only the somewhat daring venture into MLPs due to tax reasons. And that keeps the yields unnaturally high. And the need for new energy infrastructure will keep the demand for these assets on the high side. The result of that combination of situations is both high yields with better than average growth for these companies.

    So having a 20% [or slightly lower] asset allocation to MLPs works for me. And with a portfolio weighting THAT high, owning at least nine MLPs is not a problem. I do not like having over a 3% total portfolio weighting in any stock - and usually I invest only 1% per stock. And I typically have several stocks in any given sector.

    Summation: you need a lot of MLPs to really have diversification. That requires a high sector weighting in MLPs. I am comfortable with that high weighting due to the higher yields on those distributions and the prospects for inflation beating distribution growth.

    NOTE - unless one chooses ETE as a GP, the suggestions fail to include any propane component. I also lack the knowledge to suggest a marine transport MLP.

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    • Factoids, a great post on the different MLPs with one exception. NRGP is a GP in the propane sector, being the gp of NRGY. I own NRGY and its had a great run from March, and I am now looking at NRGP as they increased their dividend faster than NRGY. BTW, NRGY is diversifying out of propane as they picked up a salt mine operation. While they are growing through acquisitions, they never seem to overpay which is want you want in a company.

      • 3 Replies to marklibera
      • I was thinking coal GP AHGP when I typed in propane NRGP. NRGP is propane. AHGP is coal. 'marklibera' - thanks for noting that error.

        So here are the alterations, corrections and amplifications to the original 'recipe' to get MLP diversification: [This recipe presumes an equal weighting given to all purchases.]

        . . if you want to diversify, then you need to add exposure to propane, E&Ps, the GPs and the G&Ps [and to get diversification while potentially hurting returns, add exposure to coal and marine transport].
        [1] Add MMP - an MLP that [after its merger with its GP MGG] does not have any IDRs - and MMP already had a superior history of distribution growth before that adjustment
        [2] Add two small cap midstream MLPs. I would suggest BWP and newbie EPB, but GEL and SEP are also very good suggestions.
        [3] Add two gathering and processing [G&P] MLPs. I would suggest MWE [Marcellus] and RGNC [Haynesville]. But KGS and NGLS are also good suggestions.
        [4] Add two general partners [GPs]. To get diversity, I would suggest Propane GP NRGP. Given that you already own EPD, EPE would not add diversity. So that leaves BGH, ETE and NSH as good suggestions. And if one wants to add some coal exposure for diversification reasons, then add AHGP. That leads all both GPs being non-midstream. And I do not really like that idea. But if the priority is to have a small numbers of stocks that leads to the widest diversification, then one needs to take this short-cut. One may want to
        [5] Add one exploration and production [E&P] company. Going by past distribution history, I would suggest EVEP, LGCY, or LINE. One may want to cut their weighting per stock in this sub-sector by one third - and buy all three.

        One can alter the 'equal weighting' assumption and probably arrive at a better portfolio. [Examples - to get more safety (via having a longer history, being credit rated, having a stronger balance sheet, and having contracts that would suggest a more safe and steady distributable cash flow) - over-weight EPD and MMP. To get more growth, over-weight the GPs (or buy three). To get more immediate yield, over-weight the G&Ps (or buy three).] But to keep this message short and simple - I did not go into that topic.

        On coal - given that I only track two coal partnerships, and one of them [PVR/PVG] has an anemic distribution growth - having 50% of the sector under perform makes me suspicious about the whole sector. So I may be overly skeptical about ARLP/AHGP.

        On marine transport - I have tracked the sector's price and distribution changes for four years without ever listening to a conference call. And the returns over that period has not inspired me to put in much effort in investigating these MLPs. Someone who has done more due diligence here may have seen a greater need than I do on including one of these MLPs for diversification.

        On propane - Given that I already have propane exposure via investments in ETP and DPM, and given that the sector had some problem members who were cutting distribution back when I first started my MLP investing, I never generated an interest in tracking them. NRGP had 30.77% distribution growth in 2009 and 21% distribution growth in 2008. Stats like that are changing my original negative impression of this sub-sector.

      • NRGY's cost of borrowing is 300 basis points over many other MLPs.

        Given the destruction we have seen it seems to me this is an important element.

        My homework suggests that NRGY is paying up to be an industry consolidator in the propane industry.

        I am not interested in NRGY because of its cost of money and that it pays up for residential propane delivery companies.

        I think there are better choices outside the propane segment and I say pass on propane.

        Factoids list is very good. I happen to own a very diversified set among his list.

        My belief is that given EPD's CEO recent large purchases of EPD and EPE he knows the Teppco deal is going to be highly accretive to EPD.

        I also believe NS will shine when the government starts investing in roads and asphalt sales go through the roof.

        EPD and ETP are the big dogs in the Haynesville pit for NG and are must holds if you believe NG will become the transitional fuel. That is a big assumption since congress clearly whores for coal because king coal pays off the Washington whores.

        PAA is just plain a best of breed. Their cost of money is cheaper... I repeat, cheaper than KMP. That says a lot in an era where balance sheets are king and the cost and availability of money is THE most important element of owing MLPs which are looking to grow.

      • for those of you that own or follow or are considering buying NRGP and NRGY (GP), they just issued a sweet earnings report.

        http://finance.yahoo.com/news/Inergy-Reports-Record-Results-bw-1987426376.html?x=0&.v=1

    • Thanks for the commentary Bob. It's interesting taking a peek at others' portfolios and maybe picking up a few ideas.

      To diversify beyond EPD's core businesses, it seems we either paddle upstream to an E&P or way downstream to storage and non-pipeline transportation. Looking at the higher risks there, I'm not sure the incremental yield fairly compensates their new unit holders for the extra risk. Two points come from that observation:
      1. The most important part of diversifing is the timing of your entry into a new MLP.
      2. Perhaps EPD is unfairly undervalued.

      With coal MLP's being this year's stinker, maybe that is where one should be adding exposure. I can see the politics of the moment, but my coal MLP has a real nice yield....

    • For my diversification, I own ARLP as my coal MLP.

    • thank you so much. i really appreciate this.

    • i just realized it was you who posted this. guys this guy is very very good. thanks again

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