I am retired and take educated guesses on all things financial.

April 16, 2007

April 17, 2007: A pipeline of earnings for you: MLP Pipelines

MLPs are Master Limited Partnerships that are designed to distribute acquired revenues on a tax advantaged basis. They present ideal opportunities for pipeline companies to maximize the tax laws to their advantage in an identified "risk" such as energy transport.

Once reserved for the wealthy few, over the past two decades MLPs have become more readily available to investors as one buys stock ("units") of the trust to share in the fruits of IRS K-1 entities. I have owned shares of MLPs off and on for at least ten years. As with stocks, there is a season to buy and a season to sell.Yields on many are very attractive when matched with modest (and sometimes dramatic) upward valuation of units and an expectation of regular dividend ("royalty") hikes.

Finding real value in stocks at this time is getting harder to find. Investors may park money in low interest accounts that stagnate and are fully taxable. Voila,
the unit trust becomes a great investment tool.

MLP pipelines give the investor who follows their portfolio regularly a look at commodity prices and how the changes in price can affect the MLP business model, and thus the distributable cash flows and valuations. Also, trends can be spotted that will require infrastructure build out, and based on current ownership of assets, one should be able to surmise a short list of potential MLPs that could benefit from a new project. Investors will also be able to identify bottlenecks in the distribution channels, such as Canadian oil sands product having to be pipe lined to Texas and Louisiana for refining (much oil sand product is so heavy it is designated for asphalt, which is a seasonal product - thus another angle to play in the bottleneck chain). Why the Texas, Louisiana area? Refineries were built for Venezuelan crude, which is also very heavy for the most part) and will be shipped elsewhere when Chavez gets his price. This is just the tip of the pipeline MLP puzzle that has many pieces.

Trying to follow all this may be considered huge expense of time and trouble. My view is to simplify.

T's criteria:
If an MLP yields less than 5.25%, don't buy it.
If it does not raise its payout at least every two quarters, sell it.
If the PE is between 15-28, it is o.k. to buy. Lower, something is wrong. Higher, too rich.
The pipeline must be centered in North America.
The pipeline MLP must have a web address.
The pipeline MLP must be followed by at least six analysts, preferably with a divergence of opinion (the best time to enter when following the other criteria, IMO).

Following my guidelines, which are mine and mine alone, I think you will be safe and pleased with your investment. You will miss a few big winners, but you will avoid most mediocre players in the game.

I recently purchased Teppco Energy Partners (TPP).I held this MLP in the earlier in the decade and was pleased, both buying and selling it. TPP is now ready to spurt forward again, IMO, by being the "furstest with the mostus" in critical pipeline areas they have built into or acquired a while back through acquisition.

Here is my list to watch. Some may not at present meet my criteria, but they appear to be solid and worth following.

Boardwalk Pipeline Partners (BWP)
Crosstex Energy (XTEX)
Enbridge Energy Partners (EEP)
Enterprise Product Partners (EPD)
Kinder Morgan Energy Partners (KMP)...a well managed MLP.
Nustar Energy (NS)
TEPPCO Partners (TTP)

Welcome aboard, "partner".

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