Every bull market eventually comes to an end. The catalysts
pushing profits, dividends and share prices higher ultimately
dissipate. Equity valuations become so high that the expectations
built into them become almost impossible to achieve.
Finally, the air goes out of the balloon. Growth slows to a
crawl or shifts into reverse. Share prices start to come down
slowly. Then, the selloff accelerates as investors lose heart and
bail out. Expectations eventually go so low that it's nearly
impossible for companies not to beat them. At this point, the cycle
begins anew on the upside.
The current bull market for
master limited partnerships
(MLPs) eventually will end. Investors' expectations will
ratchet up to levels where almost any news is a disappointment. The
massive deficit in energy infrastructure will become a surplus as
MLPs overbuild to meet anticipated demand, rather than inking
contracts with customers beforehand.
Prospective returns on new projects will fall as capacity
becomes cheap, even as capital costs rise and squeeze profits.
Distribution growth will slow to a crawl, and some MLPs will slash
their payouts. Finally, share prices will head lower. The bull will
at last be broken.
Today, however, is not that day. New MLP debt and equity
offerings have become slightly scarcer in recent months because of
the prevailing uncertainty and volatility in stock and credit
markets. But the bull market for MLPs remains intact: Valuations
capital is readily available at historically low
, and low-risk expansion opportunities abound to support rapidly
growing production from US unconventional oil and gas plays.
Enterprise Products Partners LP's (NYSE: EPD) 57-year debt
still trades at a yield to maturity of just 6.24 percent. The MLP's
five-year debt also has a yield to maturity of only 2.28 percent,
though its credit rating of BBB- is barely investment grade. Linn
Energy LLC's (
) B credit rating places the oil and gas producer firmly in the
junk category. But Linn Energy's 10-year debt sports a yield to
maturity of only 6.73 percent.
As for equity valuations, the Alerian MLP Index has been on a
tear since Oct. 4, 2011, when it briefly touched a low of 316.35.
The benchmark index has rallied almost 20 percent in subsequent
weeks, clawing its way back to its early July high. This resurgence
should encourage MLPs to finance growth by issuing new units, even
as the window to issue debt is wide open.
In a recent issue of our advisory service,
, my colleague,
, highlighted MLPs' acquisitions of major pipeline companies--deals
that would have been out of the question just a few years ago. A
number of prime takeover targets are still unspoken for, including
Williams Companies (NYSE: WMB), which only a few weeks ago was
bidding against Energy Transfer Equity LP (NYSE: ETE) for the
right to buy Southern Union (NYSE: SUG) and its portfolio of
midstream gas infrastructure.
Southern Union has set Dec. 9, 2011, as the meeting date for
shareholders to vote on the proposed takeover. The deal got a
further boost this month from yet another transaction: AmeriGas
Partners LP's (NYSE: APU) $2.9 billion purchase of Energy
Transfer Partners LP's (NYSE: ETP) propane operations. The
drop down of a $2 billion, 50 percent interest in a giant Florida
pipeline from Energy Transfer Equity to Energy Transfer Partners is
a critical piece of the general partner's financing to buy Southern
There had been questions about Energy Transfer Partners' ability
to finance drop-down transactions of Southern Union's assets from
Energy Transfer Equity because of the MLP's sizable investments
natural gas liquids
)-related infrastructure with Regency Energy Partners LP
The sale of Energy Transfer Partners' propane business solves
this problem by providing $1.5 billion in cash and a 34 percent
equity stake in AmeriGas Partners. The deal also makes sense for
AmeriGas Partners. Not only will the new assets increase the scale
and reach of AmeriGas Partners' propane-related infrastructure by
about 60 percent, but the MLP also gains a financially sound
limited partner in Energy Transfer Partners.
I expect more MLPs to step up to the plate and buy whole
companies in coming months. Meanwhile, there's no shortage of
smaller deals in the works. The pace of new projects also shows no
sign of slacking. Enterprise Products Partners, for example, this
month announced plans to further expand its NGL assets. Energy
Transfer Partners also inked a long-term, fee-based agreement to
build a 117-mile gas gathering pipeline and to provide related
services for ExxonMobil Corp (
) unit XTO Energy. The MLP will also build a major processing
XTO Energy is seeking to improve its access to midstream
infrastructure to process and transport the natural gas and NGLs
produced from its extensive reserves in the
and other unconventional plays. Energy companies throughout
North America face similar needs; the rapid development of shale
oil and gas plays requires an extensive build-out of supporting
MLP investments are well-positioned to take advantage of this
secular growth trend. All this construction adds up to higher
distributions and, ultimately, higher unit prices.
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