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Investment Updates
All views expressed in the following reports are those of the authors and not of the National Association of Publicly Traded Partnerships. Recommendations as to particular securities have been removed from these summaries. Their inclusion on this website does not constitute a recommendation by NAPTP that you purchase or sell any particular security.
Wells Fargo (formerly Wachovia) Reports
Citigroup Global Markets Reports
( formerly Wachovia Capital Markets, LLC)
MLP Monthly, March 2010
· MLPs Outperform In February. It was a roller-coaster ride in February, but MLPs finished the month in positive territory and outperformed the overall market. For February, the Wells Fargo Securities MLP Index increased by 3.8%, ahead of the S&P 500's gain of 2.9%. Performance is attributable to continued strong fund flows, relative strength of commodity prices, solid earnings results, and the relative attractiveness of MLP yields versus alternatives.
· Outlook Unchanged--MLPs To Remain Range Bound--Total Return Forecast Of 13%. While we do not foresee significant price appreciation in 2010, nevertheless, MLPs' low-double-digit total return potential represents an attractive investment option relative to many alternatives, in our view. We forecast median total return potential of 13.3%, consisting of a 7.6% yield, 3.4% distribution growth, and 2.3% capital appreciation. Given our outlook, we believe selectivity will be key in achieving outperformance. Thematically, we would focus on MLPs with above-average distribution growth prospects relative to peers; this could include MLPs with (1) NGL market exposure, (2) visible organic opportunities, and (3) better acquisition potential.
· New House Ways And Means Committee Chairman--No Impact For MLPs. The expected appointment of Congressman Pete Stark to replace Congressman Charles B. Rangel as chairman of the tax-writing House Ways and Means Committee created a stir among MLP investors on March 3, 2010, as Mr. Stark has been on the record as being opposed to the MLP tax structure. However, on March 4, 2010, Representative Sander M. Levin was named to the post. Although Mr. Levin is the author of carried interest legislation, he is familiar with energy MLPs and we believe understands their distinction from the private-equity MLPs the legislation targets. As previously noted, the current carried interest bill is targeted toward private equity and hedge funds and is not expected to impact energy-related general partner MLPs.
· 3-5% Is The New 5-7%--Growth Rate Decelerating--Source Moving To Acquisitions And Organic Investments. Consistent with our expectations, some MLPs have been reducing distribution growth targets. Whereas the median sector distribution growth CAGR was 7% from 2007-09, we forecast a more-modest distribution growth rate of 5% for the next three years. The tempered growth outlook is commensurate with a higher cost-of-capital environment, more-conservative cash management practices given a still-challenging economic environment, reduced growth investment opportunities, and diminished investor expectations, in our view. The source of future growth opportunities is also shifting, in our view, from one mostly skewed toward organic investments to a more-balanced mix of organic growth capex and acquisitions.
· Impact Of February Macro Events (Interest Rates, USD) On MLPs Should Be Manageable. February was an eventful month from a macro perspective with Greece struggling to finance its heavy debt burden, the discount rate being increased by 25 basis points, and Fed Chairman Ben Bernanke signaling in testimony before Congress that short-term rates would not be increased in the near term due to his outlook on inflation and the unemployment rate. The net impact of these events should translate into a very hospitable environment for MLPs, in our view.
· Top Picks. Available in the full report.
For further information, contact Ron Londe (314-955-3829, or click here to send an e-mail) or Michael Blum (212-214-5037, or click here to send an e-mail). Association members can access a copy of the full report, which contains all the required disclosures, by clicking here.
This report is subject to a disclaimer. Please click on the following link or cut and paste the link into the address bar of your browser: www.wachovia.com/rfidd2.
MLP Update, February 10, 2010
· Buying Opportunity — MLPs have pulled back significantly over the past week as the CITIMLP index now sits below its 2009 close. We believe this presents an enviable buying opportunity for investors to allocate additional capital or initiate new positions. Specifically, we highlight MLPs with exposure to strong fundamentals, a near-term catalyst, or attractive valuations. Top ideas are in the full report.
· Decline Not Fundamental — Given the nature of the assets at most MLPs, we note that fundamental operations and cash flows have not changed despite recent unit price performance. We believe there are three primary factors: 1) broader weakness in the energy sector; 2) units have begun trading ex-dividend; and 3) selling pressure by recent equity offering participants.
· Still Outperforming — Despite dipping under its 2009 close, the CITIMLP index has outperformed the S&P 500 year-to-date on both a unit price and total return basis. Through 2/5 closing prices, MLPs are down by ~1.5% on the year on a total return basis vs. the S&P total return decline of 4.3%. If we isolate unit price performance, MLPs are down ~3% in 2010 vs. the S&P unit price decline of ~4.4%. This represents an outperformance of ~280bps when including distributions and ~140bps considering prices only.
· Remains Stable — Our credit traders indicate that investment-grade MLP paper has been holding firm relative to the broader energy space. Despite the cancellation of the ETE bond offering on Jan. 21st, a recent $3.5 billion MLP deal priced tighter than expected. At this point, we do not believe that recent equity market turbulence and distress in sovereign debt will materially impact MLPs that may look to raise capital. In addition, we estimate capital needs amongst MLPs are relatively minimal as most will be able to cover their obligations through internally generated cash flow and/or borrowing capacity via credit facilities.
For further information, contact John Tysseland at 212-816-1442 or click here to send an e-mail. Association members can access a copy of the full report, which contains all the required disclosures, by clicking here.
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