MASTER LIMITED PARTNERSHIPS

Tuesday, September 23, 2008

Its two simple yes or no polls this time.

4 comments:

Anonymous said...: Analyst Note 09-18-2008

Two months ago we wrote a note suggesting that the fundamentals for master limited partnerships were still quite robust. As we saw it, cash flows looked strong, as evidenced by continued distribution increases and sustainable coverage ratios across the sector. We acknowledged that access to capital may cause growth to slow, but also noted that key projects continued to go forward. In the weeks since, we've seen markets disregard distribution increases, record earnings, and prospects for continued growth, and watched stock prices across the sector fall by roughly 30% since midsummer.

We can only speculate on the reasons why the MLP sector has come under such pressure recently. We suspect that hedge funds and investment banks such as the now-defunct Lehman Brothers LEH have become forced sellers of units and have been unloading positions regardless of price in order to free up liquidity. In the last few years, we've seen financial players increasingly active in the sector. However, structural impediments continue to keep most traditional institutional investors from buying units, limiting institutional investment to leveraged hedge funds and banks. When credit and liquidity dries up, these leveraged players rush for the exits. Given the relatively low trading volumes in most MLPs, we're left with a classic situation: more sellers than buyers, and the stock prices drop.

Despite recent and dramatic market action, we see no signs that midstream fundamentals have changed. In our view, the current market spasm amounts to a fire sale on MLPs, which are now trading at 8%-12% yields. In other words, MLP investors are now being offered cash returns of 8%-12% to buy stocks that are trading at 25%-50% of our fair value estimates.

However, we can lay out the bear case for several stocks in the MLP sector. Should current credit and equity market conditions persist indefinitely, MLPs that rely on bank borrowings to fund the debt portion of capital expenditures may be unable to obtain financing on acceptable terms, as banks become increasingly hesitant to lend. This could lead to a dramatic slowdown in growth projects, and subsequently, in distribution growth. The inability to borrow and lowered growth expectations would weigh on stock prices, sending unit prices lower, and further weakening an MLP's ability to raise equity capital. In this doomsday scenario, we would expect to see consolidation in the sector as MLPs with weaker balance sheets find themselves unable to afford to grow and instead become sellers of assets or acquisition targets.

While we think that such a doomsday scenario is unlikely; we recently increased uncertainty ratings for many MLPs in acknowledgement of the potential for low-growth outcomes. Even after increasing fair value uncertainty ratings, we still find compelling values throughout the midstream sector.; 9/23/2008 10:47 PM
Anonymous said...: ...that was from Morningstar by the way.; 9/23/2008 10:48 PM
Anonymous said...: The issue here is if valuations will be measured going forward on the basis of the old metrics that we've used since the 1950's.

Are we in a doomsday senario, the movement from a debt based business model to a fully equity capitalized business model for those companies that survive the credit crisis?

Or is this just a "Panic" that will pass and allow the familiar metrics take hold again?

HS; 9/24/2008 12:37 AM
Anonymous said...: Kinder Morgan Shuts Texas Oil Terminal After Fire (Update1)

By Alexander Kwiatkowski and Nidaa Bakhsh

Sept. 24 (Bloomberg) -- Kinder Morgan Energy Partners LP said a fire late yesterday shut its Pasadena oil terminal in Texas, which connects refineries from along the Gulf Coast to pipelines serving the eastern and Midwest U.S.

The blaze, which broke out in a pipeline manifold, is now under control and is ``down very low,'' Joe Hollier, a spokesman for the company, said in a telephone interview today. The company is planning to resume ``limited operations,'' later today, he said.

The fire started at 10:30 p.m. local time yesterday. One employee was injured and taken to hospital. The cause of the fire and extent of damage is unknown, according to Hollier. ``The fire was contained in the manifold pit,'' which links pipelines pumping gasoline products, he said.

The Pasadena plant is part of the company's Houston complex, taking oil products from refineries in Houston, Texas City, Corpus Christi, Baytown and Sweeny and pumping them into the Colonial, Teppco, Explorer and Magellan pipeline systems, according to a diagram on Kinder Morgan's Web site.

Valero Energy Corp., ConocoPhillips, and BP Plc, are among refiners that send oil products into the Pasadena terminal. Plants that were shut ahead of Hurricane Ike earlier this month are increasing production as the restart process continues.

The Houston Chronicle reported the blaze ``could be seen for miles'' as the Pasadena and Houston fire departments worked to put out the blaze. KPRC, a local television station, said a pipeline had exploded at the facility, according to an article on Click2houston.com.

A Pasadena police department official earlier said the fire was in a gasoline storage tank. The Pasadena site, along the Houston Ship Channel, has a storage capacity of 15.2 million barrels in 117 tanks.

Colonial Pipeline Co. said Sept. 16 that its main lines had reached ``healthy'' rates after they were shut before Hurricane Ike, which made landfall in the state on Sept. 13.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.netNidaa Bakhsh in London at; 9/24/2008 8:17 AM