Credit Suisse Analyst Yves Siegel believes master limited
partnerships (MLPs) are strong investment vehicles, particularly
in uncertain economic circumstances. He explains:
I don't think there are many other places where investors
can put their dollars and get a nice return with very moderate
In this exclusive interview with
The Energy Report,
Yves talks about the "Big Kahuna" and a handful of other
well-managed MLP names with impressive yields and sector-leading
The Energy Report:
Yves, as of July 20, 2010 the Alerian MLP Index was up 13.7% for
the year, whereas the S&P 500 was down 4.5%. What factors are
allowing MLPs to vastly outperform the market right now?
I think it's pretty simple. Firstly, MLPs are viewed as good
defensive investments in times of uncertainty. Secondly, MLPs
provide investors with an attractive, partially tax-deferred yield.
Right now, the average MLP yield is around 6.5%. Thirdly, with
distributions there's the potential income growth that could
average 3% -6%. The yield plus distribution growth still provides a
pretty good investment value proposition. I don't think there are
many other places where investors can put their dollars and get a
nice return with very moderate risk.
Is this an unprecedented time in terms of money pouring into
I'm not sure it's unprecedented. Back in 2007, you had a lot of
inflow of capital. The difference is the money attracted to the MLP
space back in 2007 was what I could call "fast money." It was more
hedge fund-based than the more traditional retail investor. They
were attracted to the unprecedented growth in MLP distributions.
Those investors tended to have a much shorter time horizon. I think
they correctly viewed MLPs as a good place to invest, but perhaps
too much of a good thing is no longer a good thing.
You mentioned the tax-deferred status of MLP distributions. Is
Credit Suisse concerned that the combination of the US federal cash
crunch and the success of MLPs in this bear market could lead to
There's always a risk that someone in government will take a harder
view of the MLPs. We don't see that on the near-term horizon. We
would say that the MLPs are building a lot of the necessary energy
infrastructure in the United States and that this is creating a lot
of jobs. MLPs provide a really valuable service, and I don't think
it makes a whole lot of sense to change the tax status.
Kinder Morgan Energy Partners L.P. (
) did a $75-million equity financing in June and Energy Transfer
Partners L.P. (
) raised about $437 million in a recent financing. In total, MLPs
have raised $7.2 billion in equity financings so far this year. Is
this normal, or is this amount of dilution cause for alarm?
I'd be careful using the term "dilution." The MLP business model is
such that nearly all of the cash flow - after maintenance capital -
is distributed to the unit holders. In most conventional
businesses, you retain a portion of your cash flow to reinvest in
the business. MLPs generally do not do that because of the
structure. That raises the question: How do you grow if you're
distributing all your cash?
The answer: You have to rely on external capital, both equity
and debt. As I said earlier, MLPs are financing the infrastructure
growth in the US They're building the pipelines, storage assets and
processing assets necessary to get the new energy supplies to
market. The way they finance that growth is by issuing equity and
issuing debt. It's really important to recognize that the MLP
structure is very transparent. Just follow the cash.
If MLPs were not able to invest that cash productively (i.e.,
have a return in excess of their cost of capital), they wouldn't be
able to continue accessing external capital. That transparency is a
plus. The mindset is: I have to be a good steward of capital from
investors; otherwise I'm not going to be able to go back and ask
them for more money. That rationale is incredibly important. As
long as MLPs have good investment opportunities, you'll see
relatively high financing requirements and a lot of equity and debt
Is the $7.2 billion invested so far this year a lot higher than
that over the same period last year?
The pace of equity offerings has quickened this year relative to
2008 and 2009 when $6.4 billion and $6.8 billion was raised
respectively in each year. This is due in part to the deferral of
offerings in those years due to difficult market conditions.
So, this isn't abnormal?
No, it's not.
You have an outperform rating on Energy Transfer Partners. Why do
you have an outperform rating on them, and what does ETP plan to do
with that capital?
Energy Transfer is one of the companies that we can point to as
building out the US infrastructure. Specifically, Energy Transfer
is involved in two ongoing multibillion-dollar projects to take
shale play gas to market. They're building a Fayetteville pipeline
that services the Fayetteville Shale and they have the Tiger
Pipeline to access the Haynesville Shale.
We at Credit Suisse embrace the notion that there will be many
investment opportunities around developing the shale plays in the
US. We like Energy Transfer because we see them being able to grow
the company via building these pipelines and benefit from the
incremental cash flow that the pipelines will generate. We also
think the management team is very good and has a very good track
record of building shareholder value. Lastly, the MLP has a very
nice yield - just north of 7%.
Which MLPs stand to benefit most from their shale-play
Well, you have Boardwalk Pipeline Partners, L.P. (
). They've spent some $5 billion on long-haul interstate pipelines
accessing some shale plays, such as the Fayetteville and Barnett
Shales. They also have some exposure to Haynesville. Energy
Transfer has a couple of pipeline projects. Enterprise Products
Partners, L.P. (
) has multibillion-dollar investments surrounding the Eagle Ford
Shale, which is a new play folks like because not only does it have
a lot of natural gas, it also has a lot of associated natural gas
liquids (NGLs). EPD is very well poised to benefit from that
The "Big Kahuna," Kinder Morgan, also has exposure to various
shale plays, including the Haynesville play via their KinderHawk
joint venture in Louisiana. They also have large pipeline assets in
Texas that give them exposure to the Barnett Shale, and they're a
partner with Energy Transfer on the Fayetteville Express Pipeline.
They've also teamed up with a small MLP called Copano Energy,
) to access the Eagle Ford Shale. Those are just a few of the MLPs
that have nice exposure to the shale plays.
A lot of these MLPs are quite large. Is it more encouraging that
the "Big Kahuna" is making investments in the shale plays?
Just from the vantage point that Rich Kinder is one of the smartest
guys around. Typically, they do an excellent job of trying to
identify trends and investing in those trends. Kinder Morgan being
there confirms that these shale plays are real, and I think are
very viable for the long term. You can make the same case for
Enterprise. I mean those guys are extraordinarily bright, as is
Energy Transfer's management.
You mentioned that one of the things making these shale plays
viable is the NGLs, which require little processing. But, in your
research, you also say that the NGL prices will be somewhat lower
for the next while.
You have to be careful because not all shale plays are alike. Some
have more NGL content than others. I think it's sort of good news
and bad news. The good news is that there's a lot of natural gas
around. The bad news is that, from a pricing perspective, it's
still supply and demand. If there's a lot of supply and not that
much demand, it does put some pressure on prices.
As we come out of this recession, we're still building demand.
Consequently, natural gas prices are somewhat depressed. We know
that crude oil prices are fairly attractive in the $75-$80 range.
When natural gas is produced, typically it comes out of the ground
wet and has to be processed. The more NGLs produced as a byproduct,
the more value that accrues to the producer.
Yes. NGL prices tend to track crude because they compete with crude
in the petrochemical market. In an environment where natural gas
prices are depressed and crude oil prices are strong, NGLs add a
really nice premium. Consequently, producers are going to drill in
areas that have the liquids-rich natural gas. That's what we're
seeing, and that's why the Eagle Ford is such an attractive
proposition for producers today.
Which MLPs have a fair amount of exposure to the NGLs?
About a third of Enterprise Products Partners' business is exposed
to the natural gas liquids. They just reported on their second
quarter earlier this week. That business was very, very strong. In
our universe, that's the one company that has the most exposure.
There are other companies we don't follow that also have some
exposure. ONEOK Partners, L.P. (
) is similar to Enterprise in that they have an integrated value
chain on the NGL side. There's a host of smaller MLPs that
primarily do natural gas processing. Those would include companies
like DCP Midstream Partners, L.P. (
), MarkWest Energy Partners, L.P. (
) and Targa Resources Partners, L.P. (
). I would classify those companies as more "pure-play" NGL
Going back to your Credit Suisse MLP market overview. It said:
Stock market volatility can present better buying
opportunities. However, we are not market timers. We continue to
add Boardwalk Pipeline Partners, Enterprise Product Partners and
Plains All American Pipeline, L.P. (
You discussed the first two earlier. Tell us why you like
What's so glamorous about Plains All American? They're focused on
the movement of crude oil through pipelines, and they also have
large storage operations. They recently did an IPO of their natural
gas-storage business - PAA Natural Gas Storage, L.P. (
). I'm not enamored necessarily with the crude logistics business,
but I am enamored with really strong management teams that have
consistently delivered year in and year out and have a track record
of providing shareholder value. Plains All American is what I'd
like to characterize as my "Rip Van Winkle stock." I feel I could
put my money in Plains and sort of sleep for a while, then wake up
to find my investment has grown nicely and feel pretty good about
it. That's the Plains All American story-really exceptional
managers, great stewards of capital and just a very, very nice
Can you talk about Boardwalk's and Enterprise's management
Boardwalk has very strong pipeline management. They know what they
are doing. They benefit from the assistance of Loews Corp. (
), a holding company run by the Tisch family that owns the general
partnership ((GP)), and that has been successful guiding the
partnership. Boardwalk also has a very capable natural gas pipeline
management team that calibrates risk very well.
Then you have Enterprise Products Partners, which was started by
Dan Duncan, an impressive visionary in the industry. EPD is a
little more of a risk taker than perhaps Boardwalk. By risk taker,
I mean a bit more entrepreneurial. Duncan's built the largest MLP
that has favorable investment characteristics due to its very large
footprint; they are well diversified in different businesses. They
have the natural gas liquids business, wherein they are the premier
NGL publicly traded company. Then they have natural gas pipelines,
refined petroleum products pipelines and crude pipelines. And they
are very conservatively financed. It's almost unprecedented to see
an MLP that has a 1.2, 1.3 coverage ratio - especially being as
large as Enterprise. This is one I'd strongly consider as a core
holding among the MLPs.
That's quite the endorsement. Spectra Energy Partners, L.P. (
), Magellan Midstream Partners, L.P. (
) and Duncan Energy Partners, L.P. (
) are all at the bottom of your capital-cost table. Does this
position these MLPs for growth? Or does cheap money often lead to
I would agree that cheap money often leads to bad decisions. We've
just beared witness to some really bad decisions because of cheap
money. As it relates to MLPs (and what I tried to articulate
before) is, if MLPs cannot deliver returns in excess of their
capital cost, they're going to be in trouble. Some MLPs have made
bad investment decisions, and they have had to face the
As it relates to the three companies just mentioned, Duncan
Energy is basically an affiliate of Enterprise Products Partners.
Consequently, Duncan has the same sort of financial discipline as
Enterprise. Magellan Midstream? I don't mean this in a disparaging
way but, when I think of Magellan, I usually think of a company
that has been very conservatively managed. But they are also
prudent stewards of capital. Lastly, Spectra has demonstrated that
they, too, are very prudent when it comes to investing capital.
First and foremost, we take our view of management very
seriously. If we don't have a strong conviction that the management
team is extremely capable, it's hard for us to have a favorable
view of that company. Needless to say, we feel pretty good that the
management teams of the companies we've discussed understand risk
and finance; and, just as importantly, they understand their
Among the energy MLPs, you have outperform ratings on Niska Gas
Storage Partners, L.L.C. (
), Kinder Morgan Management, L.L.C. (
) and Energy Transfer Partners. But you also have an outperform
rating on ETP's general partner, Energy Transfer Equity, L.P. (
). Tell us about Niska, Kinder Morgan Management and ETE.
Energy Transfer Equity benefits disproportionately when Energy
Transfer Partners raises the distribution or issues equity to
finance their growth. The general partners own something called
"incentive distribution rights." The incentive distribution rights
reward the GP for hitting distribution targets. Consequently, the
GP can grow twice as fast as the underlying MLP. Historically, most
GPs have grown faster because of those incentive distribution
rights. If one is positive on the underlying MLP, it's not
unreasonable to think you may also be positive on the general
Are you saying we're about to see substantial growth in ETE's
We think ETE is positioned for a compounded annual distribution
growth rate of 8.6% over the next three years. ETE owns the general
partner and limited partnership units in both Energy Transfer
Partners and Regency Energy Partners, L.P. (
). As such, ETE stands to benefit from the growth of these two
And Kinder Morgan Management?
Think about Kinder Morgan as two classes of securities. One is
Kinder Morgan Energy Partners (
), which pays their distribution in cash. The other is Kinder
Morgan Management (
), which pays their distribution in stock. That's the major
difference between KMP and KMR. The other difference is that Kinder
Morgan Management is structured such that investors receive a 1099
instead of a K1. That means you can buy KMR and put it in your IRA
account, and institutional investors can buy KMR because it's not
generating any unrelated business-taxable income.
That's why it exists.
It helps with financing, too. It's an attractive alternative for
institutional investors that are sensitive to investing in MLPs. In
addition, it helps finance Kinder Morgan's growth because, if you
buy KMR, it's almost like an automatic dividend reinvestment plan.
But for whatever reason, KMR trades at a 10%-13% discount to KMP.
We think KMP may be fairly valued and thus we have a neutral rating
on it, whereas we think KMR is attractively valued because we see
no rational reason for it to trade at such a large discount to KMP.
The only real difference between KMR and KMP is that KMR pays their
distribution in stock rather than cash.
Niska just did their IPO in May, and Credit Suisse participated in
that offering. Niska quite simply is a play on the need for
natural-gas storage both in Canada and the U.S. We like Niska
because they have plans to expand storage in Canada and California
and a very clean balance sheet. In essence, they have pre-financed
that growth via their equity offering. We also think that other
storage assets owned by private equity may very well be for sale.
Niska is likely to participate in those acquisitions, and that
should help them grow above and beyond the organic growth already
on their drawing board. Finally, we think the management team there
is very astute. They have years of experience developing and
operating storage. For folks looking to participate in growing
natural-gas production and the need for natural-gas storage,
Niska's very capable management makes the company an interesting
way to play that.
Do you have any thoughts you would like to leave us with?
You read that quote from our research that said:
Stock market volatility can present better buying
opportunities; however, we are not market timers and will
continue to add to positions.
I purposely said that because I think readers should
differentiate between investing and trading. I view investing in
MLPs as a multiyear commitment. The underlying rationale for
investing in MLPs is that you're investing in a cash-flow stream
that you think is secure, stable and predictable, which may very
well grow. If that's the case, one shouldn't be overly concerned
about market volatility. Just stay focused on that cash-flow stream
and don't obsess over the day-to-day swings in the stock price. Too
many investors do that. My message is to invest in strong companies
with good cash flow and visible growth.
I'm also very cognizant of the fact that MLPs have had a really
strong run in 2010. They may be due for a pullback, especially if
capital markets freeze up. Conversely, if the stock market takes
off, then you could see folks pulling out of MLPs to invest in the
next herd mentality scheme.
Yves Siegel joined the Credit Suisse Energy Research Team in
June 2009 to cover the Master Limited Partnership ((
)) and Natural Gas Pipeline sectors. Immediately prior to joining
Credit Suisse, Yves was a senior portfolio manager at a New York
hedge fund focused on MLPs. Prior to his buy-side experience,
Yves had established a leading sell-side MLP franchise, having
spent over 10 years at Wachovia Securities after prior sell-side
engagements at Smith Barney and Lehman Brothers. Yves has
received both a BA and MBA from New York University and is a CFA
Macquarie Group: No EPS Growth This Year but a
Great Yield Nonetheless