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  • marklibera marklibera Nov 22, 2009 10:36 AM Flag

    Diversification

    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.

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    • 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.

      • 2 Replies to ferdiefor
      • Those of you considering PAA should note that PAA unitholders are subject to Canadian income tax because PAA has certain assets in Canada, and are required to file a tax return in Canada.
        Not suggesting this should keep you from making an investment in PAA, but just be aware of all the facts.

        Best,

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

        This fact [the cost of borrowing] is important - and this fact [the 300 bps difference] is true. But NRGY's cost of borrowing is probably in line with [1] other propane MLPs and [2] other MLPs of similar cap size. I went to market watch's finra site to gather stats on the current yields of each MLPs publicly traded debt.


        current yields on 2016-2017 maturity notes

        NRGY 2016.7.616%
        SPH 2015 7.162%
        APU 2016 7.570%
        FGP 2014 7.835%

        EPD 2017 5.080%
        ETP 2017 5.244%
        MMP 2016 4.798%
        NS 2015 4.495%
        PAA 2016 5.700%

        CPNO 2016 8.091%
        NGLS 2016 8.598%

        Propane MLP last twelve month distribution changes

        APU +4.68%
        FGP no change
        NRGY + 6.299%
        SPH +3.105%

        So the higher cost of capital did not stand in the way of NRGY/NRGP from having superior distribution growth over the last 12 or 24 months. And NRGY's cost of capital appears to be in line with most of those other MLPs with which it is in competition for acquisitions.

        Ferdiefor also wrote that "pays up for residential propane delivery companies".
        I can not derive a price/EBITDA multiple for any MLP purchase - the press releases on acquisitions for to give us sufficient information to do that calculation. So I would answer that criticism of NRGY with the same answer used above. The cost of NRGP's acquisitions has not stood in the way of superior distribution growth.

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

        NRGP had 30.77% distribution growth in 2009 and 21% distribution growth in 2008. The goal of diversification is to own something that zigs when other parts of your portfolio is zagging. And it would be very good to have owned NRGP to have captured that distribution growth where other parts of your portfolio [the G&Ps and the E&Ps] were failing to generate distribution growth.

        Given that: [1] There are other ways to have captured that distribution growth besides owning NRGY or NRGP (or other propane MLPs) - one could have bulked up on the GPs. [2] The propane MLPs may not zig when others zag in the future. So I am not going to dispute ferdiefor advice to 'pass on propane' - because I have also passed on propane in my portfolio. But passing on propane (and NRGP in particular) was a mistake in 2008 and 2009. And if propane is a mistake - at least I am only suggesting a cose to 10% weighting in a total MLP portfolio that is 10% - 20% of your total holdings. So whether the propane idea is right or wrong will barely make a difference.

        On the other hand - the idea (or goal) of having diversification - of buying riskier assets (but in moderation - very limited moderation) - and being close to consistent in implementing that goal; THAT will make a difference.

        Summation - I am in mild disagreement with Ferdiefor's advice on NRGP.

    • 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

      • 1 Reply to ch4_tycoon
      • I don't know if I posted this here or on another board, but what struck me about NRGP (the GP of NRGY), was not only that they raised their distribution at a much greater rate than the underlying company, but that there is a presentation on their website that says their recent acquisitions will result in a continued increase at a much higher rate. Made me start thinking of switching the lp for the GP, but the GP is running away.

        On a separate note, most of these MLPs pay distributions in mid Fed (with a Jan end ex date) so there's no rush to buy them now, especially if we get a downdraft in the market. On the otherhand, the demand for yield is unabating, with several articles out on where to go now for yield (i.e. utilities).

        One other question, I bought the ETP/ETE complex a month or so ago when their capital raise helped knock a few points off the stocks. Zacks has had a few negative comments on ETP and I've been reading good news about EPD. I'll be comparing the DCF numbers, but anyone have any recommendation for switching? I could own both and may decide to do that -- there's just too many MLPs to consider.

 
EPD
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