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Enterprise Products Partners L.P. Message Board

  • dinkdestroyer dinkdestroyer Jan 6, 2010 4:40 PM Flag

    MLPs are now overvalued

    It's been a great run but the yields have now fallen to a point where you are going to see a flood of offerings. Selling Units is way more attractive(for Management) to conventional financing. The piling in to MLPs in the last month of the year was striking and almost bubble like. Investors chasing yield are pushing these to levels that are making them questionable since higher interest rates lie ahead, and that will soon become problematic for valuations. In the last 10 days I have sold almost all of a very sizable position in 15 different MLPs and would not re-enter them without 200 basis point increase in yields.
    The last time I saw people chasing yields like this they were buying mortgage paper and we all know how that ended.

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    • if i may ask where are you putting your money?

      • 1 Reply to arrrrrrrough
      • I am keeping(not liqidating) a large position in royalty trusts because they are not as sensitive to rates and their distributions are tied directly to the commodity price. If you believe inflation will be higher, the commodity(oil&gas) price will be stable or higher, these are the way to go. Some of the MLPs I sold are now going down and I am selling June Puts where I get back into the MLP at yields well over 10 percent. I have been able to do this in a couple of cases so far. In both cases the premium collected was equal to the distribution had I own the MLP during that period. Only thing is the tax treatment is different but the risk in this is much lower as well.

    • I am not saying MLPs are not good investments and EPD is a qulity MLP. What I am saying is that these are risk instruments that are priced at a premium to so-called instruments which are considered default-risk free such as US Bonds.
      Convergence in the yield spread has reached a point where growth in distributions will have to keep pace with rising bond yields or the MLP price will have to drop to make that adjustment. I think we are at a point where a prudent investor has to be concerned with what happens if Bond yields continue to rise even if the business does OK.

    • Given that you didn't like CHK at 22 on 12/03, I don't think I am going to cash in on my MLPs quite yet.

      • 2 Replies to nxyluck
      • I am not sure what you are saying but I didn't sell out my position until day before yesterday and that is all that counts. And I am happy with a $13/unit(not including call sales) gain.

      • EPD has kept in a liquid cash psoition and investment grade for debt. Management owns millions of the units of both the LP and GP.

        The distribution history is posted below.

        28-Oct-09 $ 0.553 Dividend
        29-Jul-09 $ 0.545 Dividend
        28-Apr-09 $ 0.538 Dividend
        28-Jan-09 $ 0.53 Dividend
        29-Oct-08 $ 0.523 Dividend
        29-Jul-08 $ 0.515 Dividend
        28-Apr-08 $ 0.508 Dividend
        29-Jan-08 $ 0.50 Dividend
        29-Oct-07 $ 0.49 Dividend
        27-Jul-07 $ 0.483 Dividend
        26-Apr-07 $ 0.475 Dividend
        29-Jan-07 $ 0.468 Dividend
        27-Oct-06 $ 0.46 Dividend
        27-Jul-06 $ 0.453 Dividend
        26-Apr-06 $ 0.445 Dividend
        27-Jan-06 $ 0.438 Dividend
        27-Oct-05 $ 0.43 Dividend
        27-Jul-05 $ 0.42 Dividend
        27-Apr-05 $ 0.41 Dividend
        27-Jan-05 $ 0.40 Dividend
        27-Oct-04 $ 0.395 Dividend
        28-Jul-04 $ 0.373 Dividend
        28-Apr-04 $ 0.373 Dividend
        28-Jan-04 $ 0.373 Dividend
        29-Oct-03 $ 0.373 Dividend
        29-Jul-03 $ 0.363 Dividend
        28-Apr-03 $ 0.363 Dividend
        29-Jan-03 $ 0.345 Dividend
        29-Oct-02 $ 0.345 Dividend
        29-Jul-02 $ 0.335 Dividend
        16-May-02 2 : 1 Stock Split
        26-Apr-02 $ 0.335 Dividend
        29-Jan-02 $ 0.3125 Dividend
        29-Oct-01 $ 0.3125 Dividend
        27-Jul-01 $ 0.294 Dividend
        26-Apr-01 $ 0.275 Dividend
        29-Jan-01 $ 0.275 Dividend
        27-Oct-00 $ 0.2625 Dividend
        27-Jul-00 $ 0.2625 Dividend
        26-Apr-00 $ 0.25 Dividend
        27-Jan-00 $ 0.25 Dividend
        27-Oct-99 $ 0.225 Dividend

        The adjusted unit price including distributions and splits since 1/7/00 is under $9.

        Last, when interest rates went high in the late 1990s the spread between treasuries actually decreased. The historical correlation between treasuries and MLP yields has been as high as .85 (1995) and decreased steadily to about .5 in 2004. That correlation actually went negative when hedge funds and other speculators stepped in a couple years ago and the correlation now appears to be returning to the norm.

        In looking back on the historical data, Kinder and ETP were closer to 225bps over treasuries when the market place was fairly stable in the early 1980s. I also note that almost nobody, including brokers, even knew the name MLP in 1980. Today they know they name, but most could not tell you about the structure or them.

        I for now will stand by Dan Duncan who continues to reinvest all distributions and buy millions of additional units. Until he goes I will hang in there.


    • People are chasing the yields for a reason...there are few options right now for return of any decent size. Even if they are over valued, most investors are not looking to sell a point or two of gain in the underlying units...they are looking to hold for long term income. That is a difference in the MLP vs a common stock equity.

      High income ETF's are having (or are continuing) a good run as well. Muni's, Corporates, Preferred's and Ute's are all going up as mom and dad are looking to replace matured CD's and get out of MMF's that have almost zero yields.

      And with commodity prices rising, I don't see MLP's as being richly overvalued.

      So, my 2 cents...few sellers, decent returns, few other or better options...the run may continue a while longer.

      • 2 Replies to ch4_tycoon
      • artist_formerly_known_as_pooch artist_formerly_known_as_pooch Jan 6, 2010 5:34 PM Flag

        I agree. while the yields are no longer any great shakes, there isn't much that pays comparable yields that offers any degree of relative safety.

        A lot of really crappy MLP's are now yielding in the single digits. A few distribution suspenders are being priced to yield not much more than single digits when they resume.

        There's always going to be hot money trying to lock in the short term gain. But there's a much more significant representation of buy and holders here.

        You buy the 6.8% yield now--regardless of what the unit price does, you are going to get 6.8% and a good shot at that yield increasing in future years.

      • Traditional valuation for these is a spread to Long Term treasuries and yields are pushing up dramatically. About 300 basis points spread is the historical benchmark and we are trading narrower on many. Keep in mind, these are not risk free securities and the more units they sell, the more risk there is. They are selling units because they are reducing leverage but that puts more operation risk in the unit price. You are focusing on the steep yield curve with the front end yielding nothing, that is short term OK but when the music stops look out.

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