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Energy Holdings With Juice

For their first 15 years, MLPs got little publicity and were bought primarily for their income by high-net-worth individuals on the recommendation of savvy financial advisers. They were not bought by institutions, mutual funds or foreigners because of a quirk in the way their distributions are taxed. They therefore got little research coverage at brokerages and traded in low volume.

A late-90s change in tax law increased their attractiveness to institutions, and subsequent changes in their corporate structure have started to attract an array of individuals. The latest catalyst for increased interest is investors' waning interest in real estate investment trusts, or REITs, which now pay relatively low dividend yields, are tarred by the crisis in residential mortgages and have advanced to the point where they are pretty expensive on a valuation basis.

Indeed, it's now fair to think of MLPs as the new REITs. You can buy them for income and enjoy a lot of price appreciation as well, as many of the companies involved in the gathering and distribution of energy are growing rapidly by acquiring competitors and by simply building more assets from scratch. They do not tend to trade up and down with crude-oil and gas prices, because their revenues are tied to the sheer movement of energy, not its price.

Sanity in a Hot Sector

Because these companies must pay a big dividend out of their earnings stream every quarter, they tend to be a lot more prudent about their purchases and construction projects than, say, technology or industrial companies that might make a big, splashy move just to satisfy the ego of their chief executives. And they are usually rewarded quickly for these efforts.

As an example, natural gas pipeline owner and processor Copano Energy (CPNO) on Friday announced that it would buy pipeline operator Cimmarron Gathering for $95 million to expand its footprint in the Midwest. Wall Street loved the idea: Analysts revised earnings estimates higher, and the stock jumped 4.5% Monday. Copano shares are up 74% in the past 12 months, including dividends.

If anything, you can think of MLPs as a pure play on the growth in demand for energy without having to worry about whether crude oil is going to $30 or $100. Demand has been advancing at a steady 1.5% pace for years, even in sharp recessions and at all price levels.

One note of caution: High-dividend stocks typically are thought of as safe, steady investments because a falling stock price makes the dividend yield increase (provided the dividend stays constant), thus making it less likely the stock price will fall very far. But because some MLPs have seen such huge price gains in recent years and because their dividend yields have kept pace, it's possible that the stock prices could fall relatively quickly, too, as the relatively flexible payouts might not provide a solid floor under the share prices.

There are no mutual funds or exchange-traded funds that track MLPs, but there are a couple of successful closed-end funds, such as Kayne Anderson MLP Investment (KYN). It's not that hard to build your own diversified portfolio of them, though, so you might as well do it yourself and save the fees.

The following table lists some of the best-performing MLPs.

Top-Rated MLPs
Company Market cap Dividend yield % April 9 close Industry
Inergy (NRGY: Nasdaq) $1.6 B 6.74 $33.37 Propane distribution
Teppco Partners (TPP:NYSE) $4.0 B 6.02 $45.00 Oil and gas pipelines
Holly Energy Partners (HEP:NYSE) $771 M 5.64 $47.54 Oil and gas pipelines
Alliance Resource Partners (ARLP:Nasdaq) $1.4 B 5.49 $39.37 Coal mining and distribution
Sunoco Logistics Partners (SXL:NYSE) $1.7 B 5.41 $59.59 Oil and gas pipelines
Global Partners (GLP:NYSE) $400 M 5.24 $34.41 Oil and gas refining
Calumet Specialty Products Partners (CLMT:NYSE) $793 M 4.95 $49.40 Oil and gas refining
TransMontaigne Partners (TLP:NYSE) $262 M 4.79 $36.12 Oil and gas pipelines
Copano Energy (CPNO:Nasdaq) $1.6 B 4.58 $36.45 Oil and gas pipelines
Boardwalk Pipeline Partners (BWP:NYSE) $2.7 B 4.51 $36.90 Oil and gas pipelines
DCP Midstream Partners (DPM:NYSE) $702 M 4.34 $39.73 Oil and gas pipelines

Wall Street has been busy making more MLPs to meet demand by carving them out of larger companies, such as Williams (WMB - Get Report) and Valero Energy (VLO - Get Report), and persuading smaller operators to go public.

Three new MLPs that appear worth serious consideration are BreitBurn Energy Partners (BBEP - Get Report), Linn Energy (LINE - Get Report) and Capital Product Partners (CPLP - Get Report).

Please note that due to factors including low market capitalization and/or insufficient public float, we consider CPLP, HEP, GLP, TLP and DPM to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Jon Markman owned shares of Copano Energy and Valero Energy

Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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NRGY $14.97 2.11%
BBEP $0.31 2.40%
BWP $16.47 0.30%
CPLP $2.64 3.30%
DPM $34.57 5.70%


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