FAQ: It looks like your fair value estimates and your adjusted Dividend Cushion ratios aren’t bad. What gives?
A: Thank you for your question.
The Valuentum process rests on uncovering undervalued companies that are trading at a discount to intrinsic value, but also ones that are supported by the market via strong technical and momentum indicators. The latter consideration is absent from most, if not all of the energy sector, including MLPs.
MLPs themselves, however, have a nuanced valuation adjustment in our process that leads us to have significantly less conviction than in other areas. Pasted below is a slide deck that mentions that adjustment (i.e. we exclude growth capex, even though we feel that it is an integral part of the valuation equation and shareholder money):
In short, our methodology precludes us from having any interest in the space, and the raw, unadjusted Dividend Cushion ratios for most MLPs reveal substantial capital-market dependence risk, an area that we’re not comfortable gaining exposure to as the credit market cycle matures. Further, we believe a better approximation of the point fair value estimate of most MLPs is at the low end of the reported fair value range (after including growth capex), suggesting that a meaningful discount is not yet present to most units.
Hope this helps.