AMZA

The Days of the MLP Model Are Numbered

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By Brian Nelson, CFA On August 24, Enbridge (ENB) announced that it would enter into a definitive agreement under which the entity would buy Spectra Energy Partners (SEP) at an exchange ratio of 1.111 common shares of Enbridge for each common unit of SEP, a near-10% increase from the exchange ratio announced a few months ago. As we have outlined in the past, most recently with respect to the following discussion on the Energy Transfer Equity (ETE) and Energy Transfer Partners (ETP) tie up, “ETE-ETP Rollup and Implied Distribution Cut,” consolidations are slowly eliminating the MLP model via simplification efforts and many combinations are coming with implied distribution/dividend cuts, something that couldn’t have been imagined in years prior. The story … Read more

ETE-ETP Rollup and Implied Distribution Cut

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We continue to believe that the MLP business model may be a goner, and the recent ETE-ETP rollup is the latest example. Though new capital may come into the space on expectations that there will be premiums in unit-for-unit rollup deals, most of the combinations are coming with implied distribution cuts. By Brian Nelson, CFA On August 1, Energy Transfer Equity (ETE) announced that it would roll up Energy Transfer Partners (ETP) in a unit-for-unit merger exchange. Energy Transfer Equity’s incentive distribution rights (IDRs) in Energy Transfer Partners will be eliminated, and the deal is scheduled to close in the fourth quarter of 2018. Energy Transfer Partners unitholders will receive 1.28 common units of Energy Transfer Equity for each common … Read more

The Free Cash Flow Shortfall in the Master Limited Partnership Space

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With the recent acceleration of master limited partnership simplification transactions, we find it appropriate to revisit the internally-generated cash flow shortfall present throughout much of the space. The table provides a breakdown of traditional free cash flow (cash from operating activities less all capital spending) relative to distributions paid, as well as a measure of the elevated financial leverage often found within the group. In case you missed it, “Nearly 60 Distribution Cuts Later, We Maintain Our View on the Hazards of the MLP Business Model.” By Kris Rosemann We think it is worth noting that the two entities at the top of this list in terms of traditional free cash flow coverage of distributions paid have significantly reduced their … Read more

Master Limited Partnership Simplifications on the Rise

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  With the announcement of three separate master limited partnership simplification transactions on May 17 alone, we must revisit our thesis that the business structure may not be in it for the long haul. By Kris Rosemann At Valuentum, we continue to believe the master limited partnership (MLP) business model is at risk over the long haul, and recent news from the space only seems to support the notion that the MLP model we once knew may be fading more quickly than some had expected. If there is nothing inherently wrong with the structure of MLPs, then the rate at which simplification transactions are occurring would certainly be an alarming development, but we continue to point to factors such as … Read more

Nearly 60 Distribution Cuts Later, We Maintain Our View on the Hazards of the MLP Business Model

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Image Source: Brian Cantoni Valuentum has been highlighting the inherent risks associated with the master limited partnership (MLP) structure for some time now, but we are not alone in acknowledging the limited sustainability of such structures. Internal simplification transactions may only become more common moving forward as management teams seek to optimize the structure of their entities. Readers should continue to cast a skeptical eye on this business model. By Kris Rosemann and Brian Nelson, CFA Quite possibly, Valuentum made the “call of the century” when it outlined its warning on MLPs in June 2015, embedded in its Kinder Morgan (KMI) “call,” and more explicitly in September 2015, “Why the MLP Business Model May Be a Goner.” There was a … Read more

Objectivity in Analysis and the MLP Enigma

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President of Investment Research Brian Nelson talks about how financial statement analysis keeps analysts objective. He also goes into how the distribution yields of MLPs may not reflect underlying business dynamics. Nelson also explains an inconsistency in the use of financing that supports the idea that MLPs are using external capital market issuances to fund distributions. Running time: ~15 minutes.

MLP Speak: A Critique of Distributable Cash Flow

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–> Handout 1: Pitfalls of Distribution Yield Analysis (pdf) –> Handout 2: Linking P/DCF to Enterprise Free Cash Flow Valuation (pdf) Let’s talk about a controversial metric that is used in master limited partnership (MLP) reporting. Just how useful is it, and should it be allowed? By Brian Nelson, CFA It’s been a few years since the fallout in the prices of most master limited partnerships (AMLP), but to me, it still feels like yesterday. We continue to have many concerns about the longevity of the business models of MLPs, and we maintain our view that the operating structure will be challenged over the long haul. New equity and debt funding (issuance) continues to, in part, fuel the distributions of most MLPs, … Read more

Dividend Increases/Decreases for the Week Ending January 8

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Below we provide a list of firms that raised/lowered their dividends during the week ending January 8. The dividend reports of covered firms on this list will be updated shortly with the new information. To access our dividend reports use the ‘Symbol’ search box in our website header. Firms Raising Their Dividends This Week Alamo (ALG): now $0.09 per share quarterly dividend, was $0.08. Bank of the Ozarks (OZRK): now $0.15 per share quarterly dividend, was $0.145. DDR (DDR): now $0.19 per share quarterly dividend, was $0.1725. Enterprise Products Partners L.P. (EPD): now $0.39 per share quarterly dividend, was $0.385. Formula Systems (FORTY): now $0.34 per share semi-annual dividend, was $0.23. Genesis Energy (GEL): now $0.655 per share quarterly dividend, … Read more

Dividend Increases for the Week Ending October 9

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Below we provide a list of firms that raised their dividends during the week ending October 9. The dividend reports of covered firms on this list will be updated shortly with the new information. To access our dividend reports use the ‘Symbol’ search box in our website header. Firms Raising Their Dividends This Week Ameren (AEE): now $0.425 per share quarterly dividend, was $0.41. Diversified Royalty (BEVFF): now C$0.01854 per share monthly dividend, was C$0.01667. Genesis Energy (GEL): now $0.64 per share quarterly dividend, was $0.625. Goodyear Tire & Rubber (GT): now $0.07 per share quarterly dividend, was $0.06. InfraCap MLP ETF (AMZA): now $0.515 per share quarterly dividend, was $0.51. MV Oil Trust (MVO): now $0.21 per share quarterly … Read more

3 Anomalies Across Pipeline Equities

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Kinder Morgan’s Credit Should Be Junk Status The corporate’s investment-grade credit rating does not add up. On a reported basis, adjusted for impairments, our estimate for Kinder Morgan’s (KMI) leverage is 7 times annualized first-half EBITDA, nearly a half turn greater than that of perhaps its closest peer Energy Transfer Equity (ETE), which is rated Ba2/BB/BB (Stable) by the credit rating agencies. That’s two full notches below the lowest level of investment grade and Kinder Morgan’s credit rating, despite Kinder Morgan’s dividend obligations being $350 million more during the first half of this year alone (~$750 million annualized) relative to Energy Transfer Equity, and its absolute level of debt standing above any other on this list. Kinder Morgan’s plans to … Read more