A Pipeline to Profits
This is the second consecutive post in which I am going to reference a Kiplinger's article. I'm not sure why I've never read this magazine before. Perhaps it is because I always assumed that it was filled with stupid articles like the one that supposedly tells consumers how to "Save $50 a Day (and Feel No Pain)" by doing things like switching from Starbucks' to Dunkin' Donuts' coffee.
It does have a few dumb articles that are filled with things that should be common sense, but it also contains a number of decent articles on investing. Enough that I decided to spring for the $12/year that it costs to subscribe to it. I know that most of the articles are available on-line for free, but I can only stare at the computer screen for so many consecutive hours and I like to bring magazines with me to bed, in the car, etc... I guess that I'm still old-school like that.
Anyhow, the other one that caught my eye in this issue is titled A Pipeline to Energy Profits. Pipelines and power companies are two of the only remaining places that I have exposure to common stock. I still own Boardwalk Pipeline Partners (BWP), Kinder Morgan Energy Partners (KMP), Magellan Midstream Partners (MMP), and NuStar GP Holdings (NSH) in real life and I'm long a ton of these companies in CAPS.
Having said that, other than through dividend redistribution I have not added to these positions in some time nor do I plan to in the near future. I am absolutely convinced that the markets will continue to put a tremendous amount of pressure on all common stock for the next several months, so even if these companies experience no changes in their earnings whatsoever they are likely to experience multiple contraction.
Most of the pipeline MLPs currently sport extremely attractive dividend yields in the 8% to 10% range. The good news about pipeline operators is that most of them are not directly influenced by the price of oil or natural gas. The make their money with a toll booth-like model that charges fees for transporting or storing oil and gas. In fact, many MLPs charge federally regulated fees under long-term contracts that pay them regardless of whether their pipelines are being used or not. Another aspect that I like about pipelines is that in many cases they operate as virtual monopolies. The barriers to entry in the pipeline biz are high, both in terms of regulation and how capital intensive they are.
Those are some of the positives. The pipeline sector does have some negatives that investors must be mindful of as well. As I just mentioned this is a capital intensive business. Because Master Limited Partnerships are required to pay out a large portion of their earnings to qualify for their favorable tax treatment, they usually have a lot of debt. A high level of debt is often the kiss of debt in today's market. Investors have been fleeing highly leveraged companies lately like they were infected with the plague. And in many cases rightfully so.
Hopefully the credit markets will unfreeze sufficiently at some point that these companies will have access to the funds that they need to grow. In the meantime, in many cases pipeline operators' existing operations have been unaffected by these tight credit conditions.
One of the things that I like about BWP is that a significant portion of it is owned by Loews Corp. (L). The Berkshire Hathaway-like Loews has been providing Boardwalk the capital that it needs to continue to operate in this tough environment.
A number of other pipeline operators have still been able to sell bonds even in this terrible credit market. Another company that I personally own, Kinder Morgan, sold issued hundreds of millions of dollars' worth of bonds in late 2008. Of course, the terms aren't as attractive as they were in the not-so-distant past, but it's not like KMP is going to run out of cash.
Here's a list of the pipeline operators that Kiplinger's featured in the aforementioned article:
"Energy Transfer Partners (symbol ETP) runs 17,000 miles of pipelines that stretch from the West Coast to the Gulf of Mexico and handle about one-fifth of the nation's natural-gas consumption. The company also has a retail propane business that serves one million customers and accounts for about 15% of its operating income. In December, the Dallas firm demonstrated its financial strength by selling $600 million worth of bonds to fund future projects.
Enterprise Products Partners (EPD) operates 35,000 miles of pipelines that carry natural gas, natural-gas liquids and crude oil from U.S. and Canadian fields to the Gulf of Mexico. Headquartered in Houston, the firm has raised its distribution 17 consecutive quarters. Prospects for continued payout increases are good, thanks to $4 billion worth of new pipeline projects that were completed between 2007 and early this year.
Kinder Morgan Energy Partners (KMP) is one of the biggest transporters of natural gas in Texas, the Rockies and the Midwest. Based in Houston, Kinder Morgan is also the biggest North American supplier of carbon dioxide, a key agent for boosting production in aging oil fields. Kinder Morgan's successful $500-million bond issue in December, plus the $370 million it raised from issuing new shares and other transactions, gives it a formidable war chest for pursuing acquisitions and new projects.
Magellan Midstream Partners (MMP) operates almost 10,000 miles of pipelines that carry petroleum and ammonia through the country's midsection. The Tulsa-based firm also runs 80 marine and inland-storage terminals, and it is talking to another pipeline firm about building an ethanol pipeline from the Midwest to the East Coast.
Plains All American Pipeline (PAA) moves three million barrels per day of crude oil, refined products and natural-gas liquids through a pipeline system that runs through 40 states and five Canadian provinces. The Houston firm gets about 70% of its revenues from fee-based contracts and has raised its distribution for 18 consecutive quarters."
Again, I am not personally adding to my positions in any common stock right now. I strongly believe that the markets have a decent amount of downside ahead of them over the next several months. Having said this, I have hung on to the stock of most of my MLPs. The fact that after dividends they will relatively outperform the S&P 500 in the near future should at least make them a great CAPS play.