Checkup: Energy Transfer Equity, Spectra Energy and other MLPs
August 07, 2011
– Comments (3)
During the last great selloff, Master Limited Partnerships really sold off hard, such that you could buy strong firms like Magellan Midstream, Enterprise GP Holdings, and Energy Transfer Equity at 8-10% yields. I wouldn't be surprised if ordinary investors saw those yields and thought there had to be something wrong - but while too-high yields are indeed usually a bad sign, there was actually nothing amiss with the major MLPs here. I've heard that Lehman Brothers had large MLP holdings for its own investments, and was forced to liquidate them. That led to a lot of selling pressure. Don't forget, most mutual funds aren't allowed to own MLPs due to the tax issue.
More recently, Energy Transfer and Spectra Energy lost a heck of a lot of value. Kinder Morgan Partners, Enterprise Products Partners, and some other MLPs also took a trimming. A source I trust believes that large institutional shareholders may have done a carry trade sort of thing - borrowing money to invest in MLPs, collecting their dividends. If this is true, one wonders why these investment banks haven't hearned anything, despite their seeming sophistication.
In any case, I don't believe that anything is fundamentally wrong with either company. Spectra isn't actually even an MLP, it's a C-corp version (meaning it loses the tax advantages of MLPs, but it escapes the tax complications). Investors interested in pipeline companies could consider buying or adding to ETE or Spectra today, I think.
A word on ETE's proposed merger with Southern Union: I can live with the amount the company bid, but they'd better not raise it further. I think ETE's bid is superior in terms of economic value to Williams', but not all investors are willing or able (mutual funds aren't able) to hold MLP units.
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