bqI guess i picked a great time to be away from this debacle. The MLP index is down a whopping 17 points or 5.74%. They threw them literally out the window this morning and they just keep falling floor after floor after floor. Nothing is up. Everything is down..and we have losses in some of the big boys like Nustar (NS) and Energy Transfer Partners (ETP) down 6 points each! So if you were ever looking for an opportunity to buy cheaper and in a panic....maybe this is the day!
I am going horseback riding and hope to come back to something....anything.
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About Me
- joewxman
- a meteorologist with a knack for trading and investing in MLPS! I also like horse racing, enjoy cigars and a good port wine.
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2 comments:
CitiGroup's Take on MLP Land:
Rationalizing an Irrational Environment
Buy Large Liquid MLPs, They're Inexpensive John K
Tysseland
* Buy Quality - We believe MLPs with investment grade credit
ratings and the largest market capitalizations are currently
the most attractive names in our universe following continued
unit price weakness. Specifically we believe investors
should focus on BPL, ETP, EPD, OKS, MMP, NS, PAA, and TPP.
* Beaten Down - Despite strong quarterly results and continued Ganesh Jois
distribution growth MLPs unit prices have traded down
significantly over the past six trading sessions, while other
defensive groups have rebounded. More interesting is that
MLPs with investment grade credit ratings are down 7.9% or Erik Gilje
nearly 3.9% more than non-investment grade MLPs.
* Possible Cross Hedging by Institutions- An increased number
of institutional investors now have relatively large positions
in small less liquid MLPs as a result of PIPE transactions.
In a down market, institutions may potentially hedge these
illiquid MLP investments by shorting larger more liquid MLPs
as the correlation of returns for these two categories has
been relatively high historically.
* Increased Options Trading Could be another Factor - As MLPs
have become a more widely held asset class, a growing number
have options that are listed on the CBOE. In particular many
MLPs have a significantly larger amount of open put option
contracts relative to open call option contracts. This large
put-to-call ratio could exaggerate a downward move as the
writers of the put option contracts try to hedge their
position by short-selling the actual MLP unit.
* Word of Caution - While investment grade MLPs appear
attractive on a valuation basis, these factors have the
potential to exert further pressure on some MLPs in the
near-term.
See Appendix A-1 for Analyst Certification and important
disclosures.
Opinion - Buy Large Liquid MLPs, They're Inexpensive
We believe MLPs with investment grade credit ratings and the largest market
capitalizations are currently the most attractive names in our universe
following continued unit price weakness. Specifically we believe investors
should focus on BPL, ETP, EPD, OKS, MMP, NS, PAA, and TPP. On average
these MLPs are down more over the last few trading days and are more
attractive long-term investments based on the following:
* Higher yields
* A lower cost of debt that is not as impacted by a distressed credit
market
* Distribution growth based on increasing volumes or organic capital
projects with high rates of return
* More stable cash flows with less exposure to commodity prices.
Figure 1. Year-to-Date Index Price Performance: MLPs, Utilities, & REITs
Source: Citigroup Investment Research
As shown in Figure 1 above, the Citi MLP Index (ticker: CITIMLP) has held up
extraordinarily well versus some other sectors year-to-date. The last six
trading sessions, however, have been gruesome with the index being down
7%, while the other sectors have rebounded. We do not believe this weakness
in the MLP sector is based on fundamentals. In fact most MLPs have reported
better than expected second quarter results. In our opinion the recent
downward momentum in the group has been caused by a number of other
factors. Initially we believed this group was due for a slight pull back as
other defensive sectors came under pressure over the last few weeks.
Interestingly, MLPs have only seen a significant pullback over the last few
days while other sectors have started to rebound. So why have MLPs traded
so differently?
We believe some investors are concerned about the impact a distressed credit
market might have on MLPs. Because MLPs payout the majority of their cash
flows in the form of distributions to unitholders, partnerships are regularly
raising capital to fund accretive growth projects or potential acquisitions.
Therefore widening credit spreads would reduce the potential return on any
prospective project or acquisition thus also reducing the distribution growth
outlook. This would be especially true for MLPs with credit ratings that are
below investment grade as these spreads have increased even more over the
last few weeks. However, MLP unit prices do not share our conclusion. In
fact, MLPs with investment grade credit ratings are down more than non-
investment grade MLPs as shown in the figure below.
Comments from Wachovia posted Monday morning:
Siegel, CFA: MLPs Not Immune to Market Turmoil
** MLPs Have Corrected Approximately 10% Since 7/13/07, But Still Up YTD: Volatility in the broader markets and the fear of a credit crunch has spread to the MLP sector. After a 19-month rally of 45%, MLPs have corrected approximately 10% since 7/13/07 (versus 8% for the S&P 500).
In two past similar rallies, MLPs corrected approximately 15% (see
figure 8 inside report). Such a decline would push the Wachovia MLP
index down 6% to 383 from 406 currently.
** Distribution Growth Is Driving Performance: Year-to-date, the Wachovia MLP index is up 9.6% versus 1.2% for the S&P 500.
However, the current yield has expanded back to 6.0% from 5.9% at the start of the year and 5.4% at the recent peak (7/13/07). Price-to-2007E DCF multiples have fallen to 14.6x from 15.8x at the recent peak and 13.0x at the beginning of the year. In other words, distribution growth is driving performance. Distribution growth should approximate 9% and
10% this year and next, as MLPs benefit from the completion of organic growth projects and acquisitions.
** Capital Costs May Rise But Should Not Have A Significant Impact: MLPs are well capitalized with average debt-to-EBITDA ratios of about 3.5x and debt-to-cap ratios around 50%. Financial liquidity, in our view, is not a problem. However, non-investment grade debt financing costs have risen 100-150 basis points over the last few weeks and investment grade debt has widened about 25 bps, based on our talks with management teams and our fixed-income analyst. MLPs should be able to continue to finance growth, although it may be more expensive on the margin. A favorable effect may be a decline in acquisition multiples due to rising capital costs. However, M&A activity may slow as buyers and sellers readjust their expectations. This slowdown should not have a significant impact on drop down stories, in our view.
** New Money Equals Fast Money: The increasing presence of hedge funds may be adding to the selling pressure. Forced redemptions and leveraged positions may very well be pushing these institutions to the exits. In contrast, MLP-dedicated funds seem to be holding up well, have money to
invest, and generally view the pullback as an opportunity to buy high quality MLPs; as do we.
** Fundamentals Remain Intact: Q2'07 reported DCF/unit and declared distributions have so far been in-line with our estimates. Midstream MLPs have been exceeding our estimates (median positive DCF/unit variance of 8%); pure-play GPs have been falling short (median negative DCF/unit variance of 2%). MLPs continue to benefit from relatively high commodity prices, record drilling activity,
favorable processing margins and continued volatility, which increases marketing profits.
** How To Play The Group: We view this correction (profit-taking) as
healthy and believe it has created some good entry points within our
universe. We continue to like large cap investment grade names. These
include the following Outperform-rated MLPs: EPD ($29.10), ETP ($51.35), KMP & KMR ($50.90 & $48.07), OKS ($63.16), and PAA ($59.25). Among the
upstream MLPs our top pick (Outperform rated) would be EVEP ($35.41).
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