Ferdie, I agree about EVEP regarding best of breed, and not all that thrilled with Linn but I do own some, purchased recently. But, there's one thing going for Linn and that's the Granite Wash. They are doing horizontal wells there and the gas coming out is very rich and wet. In fact, the pricing of the dry gas doesn't matter that much. The wells appear to be cash cows. This is internal development, not acquisitions. It's a little different than typical MLP drilling activity. But, the wells seem to be so good, they are going after it. They could also, JV some of it or sell some of it. We are going to have to see how this turns out.
I follow the big 5 E&P that Citi recommends because I like their thesis regarding investment approach to this area of the market where there are no guarantees and commodity risk is highest.
LGCY, LINE, EVEP, PSE, and VNR are paying 8-10% distribution yields. I assume this is a range for best of breed. Anything 200 basis points outside that range represents (to my way of thinking) paying me more to take on more risk. I don't want 200 basis points more risk with an E&P that does not appear to have the same qualities in its dropdown godfather as EVEP. Those qualities include direct ownership by our godfather in EVEP and the well decided path of dropdowns to maximize EVEP's value.
LINE has locked in substantially all of its production til 2013 and needs significant acquisitions to move the dial toward higher distributions since it is living off of those incredible hedges they did at market highs two years ago. It will be very hard for LINE to duplicate its performance thus my reasoning why they are the highest yielder within Citi's best of breed group so I don't want to own them either. I don't think LINE can produce decent distribution growth without taking on significant acquisition risks. I prefer the measured course of acquisition and the measured hedging of EVEP to LINE.
I think that's where you'll see the growth. Over the last several quarters MLP's have been more or less holding their ground on distributions, maintaining very solid coverage even in the face of substantial increases in units. There's some gradual movement toward increasing distributions, and I think managements are feeling more comfortable with fresh balance sheets with lower leverage, so eventually that will play out.
In the meantime I think most or all of the mid-cap MLP's have not yet digested recent capex increases and acquisitions. Aside from low gas prices, things are setting up pretty good, but I'm really looking beyond 2012 for substantial cash flow growth. Hopefully by that time the weak gas players will be crowded out by unrelenting low prices and we'll start to see demand catch up with the supply overload.