One Horse You Shouldn't Change Midstream

As a rule of thumb, smaller midstream MLPs have always represented higher-risk bets, and have needed to offer higher yields to compensate for that fact. With relatively smaller infrastructure to generate revenues from, they have far less room for error when it comes to down time due to unpredictable events -- like hurricanes. This is not lost on capital markets, and if a small MLP also needs to raise money in the coming months, they may not get favorable terms -- if they get them at all.

Assessing Your Investment and Finding the One

So if you're going to stick with your MLP bets here, make sure they have capital on hand to withstand this downturn, and a broad portfolio of assets, as well. This generally means sticking with larger midstream MLPs, and taking your lumps in the smaller ones.

For investors tempted to buy into smaller MLPs right now, make sure you're being compensated for any risk, as they may have a tough time accessing capital in the near term. A low-to-mid-teen indicated yield is what you should expect in a smaller MLP, and that still may not be sufficient if the MLP has a large note coming due soon.

Enterprise Products Partners LP (EPD Quote) is one of the larger players in the space that will survive this downturn, but even its quality shares have fallen nearly 15% since the beginning of September. EPD now yields just over 8%, which is historically high for this security.

While the indicated yield could yet move higher before this financial catastrophe is over, any further decline in EPD should not be the result of fears of being rejected in the capital markets. Enterprise can wait until October 2009 to hit up the market for more funding. That's when a $500 million note comes due.

In the meantime, Enterprise has reduced its distribution growth for about 7% last year, to 6% so far this year. This has allowed the firm to amass over $200 million in retained cash in the first two quarters of this year. It is not unreasonable to expect Enterprise to double that cash figure in the second half of this year.