There’s a lot of buzz in the financial news about master limited partnerships these days. You hear that they’re the buy of the decade, then you hear they’re a sucker’s bet. The sucker’s bet people are currently screaming the loudest, and if you look at the charts and the high yields on many MLPs, investors are listening.
So why am I interested in MLPs? I’m looking for a longer term investment in the energy space that is currently beaten down, but has somewhat less exposure to the price of oil and natural gas than your typical energy company. As anyone who’s been following along knows, my investment in Chesapeake Energy (NYSE: CHK) has really held back my results so far. I’m sticking with CHK, but I’d like to increase my exposure in another area of the energy universe.
So to start this process I looked at Energy Transfer Partners (NYSE: ETP). Why did I focus on ETP? Jim Cramer, of CNBC fame, did a piece on it a few months back and got me interested, so I’ve had an eye on it for awhile. Mr. Cramer is one of those love-him-or-hate-him types. I’m sure there are a lot of people out there who’d ridicule me for watching his show, but I enjoy it, and I’ll take ideas however they come to me.
ETP is an MLP that is makes money off of the transport and storage of natural gas and natural gas liquid. According to their website, they own and operate around 62,500 miles of pipeline. They’ve got their fingers in some other businesses, including crude oil pipelines, and retail marketing of fuel and other merchandise through company owned locations, to name a couple, though some of these activities are through companies owned or partially owned by ETP. It seems a little complicated, but what is REALLY complicated is the Energy Transfer family in general.
Energy Transfer Equity (NYSE: ETE), itself an MLP, also owns the general partner and 100% of the incentive distribution rights (IDRs) of Energy Transfer Partners. ETE is basically the top dog of the Energy Transfer family. I think I have a fairly good handle on the organizational structure here, but I’m not comfortable commenting on it much further as it is complex and it would be easy for me to get the details wrong. Suffice it to say that there are several entities I haven’t yet mentioned that are in the mix in various ways.
Part of the problem here seems to be the complexity itself. From what I’ve gathered, many investors are uncomfortable with the structure. Frankly, I can’t blame them. Go to ETE’s website and look at the flowchart. It makes you want to give up and go buy Apple (NASDAQ: AAPL).
But then, Apple isn’t yielding around 13%. Energy Transfer Partners is, depending on what day you look at the price. Of course it’s only yielding that because of investor fear that the current commodity environment will hurt the Energy Transfer family, causing ETP to lower its dividend, similar to what Kinder Morgan, Inc (NYSE: KMI) recently did. Will ETP cut its dividend? There is no clear consensus, and for a small investor such as myself, it’s impossible to know. But researching ETP has brought me to two tentative conclusions.
First, I think Energy Transfer Equity is the company to invest in, not Energy Transfer Partners. ETE has a good deal of insider buying, which is nice to see. Also, what’s good for ETP seems good for ETE because of the IDR payments from ETP to ETE. ETE seems to rely on ETP for most of its financial health, but has additional income streams as well. Plus ETE is in the process of buying another pipeline company: Williams Companies (NYSE: WMB), and its associated MLP, Williams Partners (NYSE: WPZ), for what looks to be a good price. The main question here is whether or not ETE has taken on too much leverage making the acquisition.
This acquisition opens up new parts of the country to the Energy Transfer family, brings economy of scale, but does nothing to simplify the flowchart of who owns what, who owes IDR’s to who, and what assets will be dropped down to which entity. If the Williams acquisition goes through, ETE, itself an MLP, will be the leader (general partner) of four other MLPs, as well as a liquid natural gas company that is not publicly traded. So the alphabet soup involved here is ETE, ETP, SUN, SXL, with ETE buying WPZ and WMB. Still with me?
My second tentative conclusion: Understanding this is hard. Or, to put it another way: Screw it, I’ll just buy an ETF. So the Alerian MLP ETF (NYSEArca: AMLP) might just be the way to go. AMLP owns ETP and a bunch of other MLPs in similar businesses, and even a couple of others in the soupy mix mentioned above. Generally I’m not a huge fan of exchange traded funds. Why not just do the research and pick the good companies and go with those? Well, in this case I’m searching for yield (and the floor of protection it provides), and it’s pretty unknowable, for me anyway, whether or not any particular company is going to cut its dividend, thereby tanking any investment in its stock. With the ETF, at least the risk is spread around.
It seems that this sector of the energy market is in for more pain. I’m keeping a close eye ETE and AMLP, while keeping ETP on the radar. Maybe someone in the Energy Transfer family cuts its dividend and the stock plunges, maybe another big player does, or maybe sentiment just gets so bad in the space that the stocks plunge without a dividend cut. I’m usually happy to tell you where I think something should be bought, where I have my limit orders at, etc… But for this, I’m just going to have to keep an eye on it and go with my gut.
As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.
Michael, the Stock Picking Bartender