Alex.....I see you posted that you are long (bullish) on EEP, TPP, EPE, KYN ......I am curious about your opinion.....How would you rank the four companies as far as best to worst (all things considered)....and secondly, how would you allocate to each company percentage wise, if you owned all four ......just curious to your opinion.....
disclosure...I am long on eep ....looking to add to my positions of strong balanced sheet high yield stocks
Thanks for the question...I might have to give you a longer answer than you wanted, but perspective is important. I have been in the markets for over 20+ years, from passive investor to aggressive trader (including 5 years doing IPO's). I lived through the crash in 87 and it helped shape some of my philosophies that I still use today. I am also an MBA in Finance as well as my undergrad was in Economics. Not meant to brag, just to give you a background.
I spent over 15 years as a business consultant, but took the last few years off to build my house. I had clients that provided a steady income (retainers), that made me financially comfortable. About 4 months ago, within a week, 2 of my important income streams dried up. Whoops, time to make a change. I had pulled out of my stock market positions, so I was sitting on cash from late 2007/early 2008. I usually believe in diversification, with no security being over 5% of your portfolio, however these opportunities lead me to break my rule.
Based on the market pullback that started last summer, I knew I needed to replace some income, but the market dynamics were choppy. Experience told me that during every downturn, you can count on the financial porn media (Money magazine, Cramer, CNBC, et all) to dust off their "flight to quality" and "new focus on dividends" stories. I wanted to be long on those positions that had been beaten down already, but offer other investors the safe haven when the media spotlight hit them. I researched the whole spectrum of stocks that were paying dividends, and honestly thought it was slim pickings. I bought some CBS (yielding 14%, embroiled in the will Redstone sell or not) but outside of that, I didn't like many of the companies that were screened.
I did recognize Teppco Partners on the list, as I took part in their IPO in the early 90's. I sold quickly and didn't think about them until they ended up on the list. Being kind of compulsive, I began my due diligence. I read the good primer at www.alerian.com/MLPprimer.pdf
and started reading posting at investor village www.investorvillage.com/smbd.asp?mb=5028&pt=m
I learned that TPP still had conservative management, a slow and steady philosophy (19 years distribution track record), diversified product (oil, nat gas, jet fuel, propane), Dan Duncan was behind them, they have the TOPS project with ETP and EDP, and although they were not the "Cadillac" of names like KMR or PAA, but at the time, the yield was over 11%, significantly better than the first tier names. I weighed the negatives of more costly capital, and my ability to never be able to buy at the bottom against the historical stock market return of 10.3%. It came down to "If I have to wait out a bear market, this company will pay me over 11% to wait - tax deferred" Why not? What I didn't know was the extent of the damage that the Hedge funds would cause. They liked it for the same reasons that I did, and thus I watched my shared go from 25 to 18 in no time. I bought more on the way down.
Because I decided to break my diversification rules, I kept on researching. Looked at the irrational un-exuberance that the market was showing the MLP space. It was getting crushed, why??? Semi-regulated, high cost of entry, tax advantaged, limited competition, long term contracts with customers, elevator clauses, etc. were being treated like companies that have a multitude of issues. So I started to look around at the other MPL issues. I like EEP for the same reasons you are long, I listened to their presentations, called investor relations, looked at the "expert" analysis, and came to the conclusion that it was worth the risk, so I began purchasing at low 30's down to mid 20's.
Then looked at my now skewed portfolio, and thought need to examine some of the mutual funds that could at least provide some more diversification. KYN was getting no love from even the savvy posters at investor village. It held a blend of MLP securities that included the now beaten down Cadillac names, as well at EDP, ETP, PAA, and others. The cost was high for the diversification (about 2%), but I was able to buy during their asset coverage ratio issue below 12 (about 15% yield). Although I pay a management fee (vs creating your own basket of securities), I got it well below NAV, and it was a diversified base that was going ex-div in a few weeks. So I pulled the trigger on it.
Because I can't shut my mind off, I then began to go back to prior market drops and realized that if I was viewing many in the sector as once-in-a-lifetime buys, a few board rooms of the "Cadillac" names must be thinking the same thing. If I was a CEO, I would look to buy complimentary businesses that have been taken out to the wood shed in the last 6 months. I tried to figure out who was being aggressively raising capital to finish projects or, if I was right, to acquire other companies "on sale". One name came out EPE/EDP. I added a smaller position, based on the yield (10%) and the possibility of faster than market place distribution increases. Low and behold, today 1/6, I find out that in addition to the $600 million senior notes, EPD has announced intend to sell equity to raise even more cash. (This was luck on my part). If you look at their financials, you will see they have plenty of cash and ability to fund their CAPEX projects, my only conclusion is that they are getting ready to acquire someone.
With all of that said (finally), I'll answer your question. I will have to assume you are in this for the long term. My top choice would be directly owning TPP. It won't have the fastest capital gains, but in return you will get a very conservative dependable management team. Also throw in their discounted dividend repurchase plan, which gives you a 5% discount and adds to your basis in the stock (offsetting the reduction of basis that the "return of capital" tax deferral status provides).
Second, I like the way EEP structures their deals. They get their customers to commit early, and they commit to volumes, cost of capital adjustments, and other guarantees. I'd hate to be in direct negotiations with them, but I love the idea of profiting with them. They have more risk, but if their Alberta Clipper project is what they think it will be, as well as their other projects, look for rapid distribution increases. Keep in mind, they are currently selling for near book value, and their depreciation alone can mostly cover their distribution. I feel the risk vs. reward ratio (a concept some on these boards need to become familiar with :)) is very positive.