AMLP

Valuentum: Energy MLPs Continue Swoon

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Energy master limited partnerships (AMLP, AMZ) continue to be in a world of hurt as investors reevaluate the sustainability of distribution streams and reassess the fundamentals on a pure traditional free cash flow basis. Many, however, continue to point to uncertainty related to the completion of the deal between Energy Transfer Equity (ETE) and Williams Partners (WMB) as reason for the sharp drops, but if you recall, both stocks collapsed on the announcement of the deal in October, both stocks collapsed when speculation grew a deal would not be completed earlier this month, and both stocks collapsed when the deal was reiterated last week. Instead, we think the market is focused on tangible long-term fundamentals, free cash flow generation, leverage … Read more

ETP’s Distribution Financially Engineered? Debt Junk-Rated?

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The term “financially-engineered distribution” has increased in prominence as of late, as investors face an unprecedented swoon in the prices of master limited partnerships (AMLP). But what is a financially-engineered distribution and how does it differ from an organically-derived dividend, paid by Microsoft (MSFT) or Apple (AAPL), for example? We’ll cover this, and we’ll also talk about why we think Energy Transfer Partners’ debt is “junk.” We have to look at the SEC filings to help explain. Let’s first start with our definition of a financially-engineered payout. Based on generally accepted accounting principles (GAAP), the cash flow statement breaks down into three distinct components: cash flow from operations, cash flow from investing and cash flow from financing activities. Bear with … Read more

Bye Bye Energy MLPs

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West Texas crude oil prices (USO) just broke through $32 per barrel to the downside for the first time since 2003. Share prices of those in the energy complex (XLE) continue to reel, and we maintain our view that the tremendous fallout in energy master limited partnerships (AMLP, AMZ) may not be over. From our perspective, the MLP business model may not survive in its present state, as equity markets continue to “wise up” to the artificial equity pricing paradigm that has centered on the group’s financially-engineered payouts. Without an artificial pricing paradigm to “prop up” their equity prices, for example, the incentive to perpetuate such a business model is substantially reduced. Distribution cuts would then inevitably ensue as a … Read more

Seeking to De-risk the Newsletter Portfolios

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There’s never a good reason to panic in investing, but the 276-point slide in the Dow Jones Industrial Average (DIA) January 4, the worst start to a year since the credit crisis in 2008, reminded us why we hold more than a 30% cash position in both newsletter portfolios at the moment: with a US stock market still near all-time highs, we like having ample capital available to scoop up bargains as stocks inevitably give back some of their gains. The question for us is not whether the broader US stock market will decline from here but whether such a decline will be 10%, 20% or more. After all, the S&P 500 (SPY) has essentially tripled from the March 2009 … Read more

Cash Is King: Microsoft Leading the Charge!

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It’s sometimes difficult for companies to overcome a tarnished reputation, particularly when it comes to a spotty dividend track record, but also as it relates to equity performance. The stock market is often unforgiving at times. Microsoft (MSFT) had long been viewed as “dead money,” or a term that describes an equity that languishes in a small trading range for years. For example, from 2010 to the beginning of 2013 (at the time it was added to the Dividend Growth Newsletter portfolio), Microsoft had bounced around in the mid-$20s per share. But as the chart below shows, overcoming a tarnished reputation is not impossible; in fact, Microsoft has put its “dead money” reputation behind it, powering past levels even witnessed … Read more

Focus on ETE, Not ETP; Strive for Balance and Stick to the SEC Filings

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We continue to be grateful for the favorable reception of our research and analysis. Our mission to help investors of all types remains our core focus and a cause buttressed by our independence and analytical integrity. You can read more here about Valuentum and its President of Equity Research Brian Nelson, CFA. It appears there continues to be a significant amount of confusion about the securities associated with the Energy Transfer companies, a collection of assets that includes the corporate parent Energy Transfer Equity (ETE) as well its consolidated subsidiaries: “Energy Transfer Partners (ETP), ETP GP, ETP LLC, Regency, Regency GP, Regency LLC, Panhandle, Sunoco, Inc., Sunoco Logistics (SXL), Sunoco LP (SUN), Susser and ETP Holdco (per Energy Transfer Equity, L.P, … Read more

FAQ: Help Me Understand Your Research on MLPs

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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 … Read more

Dividends Not Safe as Energy Markets Swoon

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We’ve been cautious on the oil and gas markets (XLE, AMLP) for some time, and that includes our October move closer to market neutral on the sector, but we’re still underweight the group. We’ve been saying that crude oil prices are more likely to hit the $20 per barrel level than move significantly higher, and we maintain our view that they may never again return to the $100 per barrel, a level many have grown accustomed to. After all, why should they? Unfortunately, the fallout continues to punish traditional “buy and hold” investors who have been trained to ignore most “news” and may still be holding on the belief of the fallacy of mean reversion, something that we believe cannot … Read more

Master Limited Partnership Model Still At Risk

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Valuentum’s President Brian Nelson’s concerns regarding the master limited partnership business model became mainstream in June of this year. In his piece, “5 Reasons Why We Think Kinder Morgan’s Shares Will Collapse,” an article that itself may go down in history as one of the most timely pieces of research ever written–in light of Kinder Morgan’s (KMI) eventual collapse–Mr. Nelson said of the MLP space at that time: Most, if not all, MLPs report distributable cash flow (DCF), which does not in the calculation consider growth capex, an important driver behind the generation of increased cash flow from operations in the future. When MLPs report distribution coverage ratios, this particular calculation also backs out growth capex from the equation, instead … Read more