The joint monthly web chat for subscribers of The Energy Strategist (TES) and MLP Profits (MLPP) took place last week. The chat is conducted by Igor Greenwald, who is managing editor for TES and chief investment strategist for MLPP, and myself.  

There were six MLP questions remaining at the end of the chat that required an extended answer, or a bit more research. This week I will answer three: one on the MLP Parity Act, another on Regency Energy Partners (NYSE: RGP) and Suburban Propane Partners (NYSE: SPH), and finally one on Golar LNG Partners (Nasdaq: GMLP).

Next week’s issue will tackle the three remaining questions: one on MLP equivalents in Canada and Australia, one on Enbridge Energy Partners (NYSE: EEP)  and TC Pipelines (NYSE: TCP), and a third query on Access Midstream Partners (NYSE: ACMP), Crestwood Midstream Partners (NYSE: CMLP) and Mid-Con Energy Partners (Nasdaq: MCEP).

For answers to some remaining energy sector questions from the chat, see this week’s issue of The Energy Letter.

Q: Have you heard of any new prospects for Congress to allow solar (manufacturers/ installers etc) to obtain MLP status? That would be a nice help by providing the tax advantages of MLPs.

I covered this in some detail back in August in Gridlocked Congress No Threat to MLPs. Here is a quick review. The Master Limited Partnerships Parity Act (MLPPA) (S.795, H.R.1696) was sponsored by Sen. Chris Coons (D-Del) and US Rep. Ted Poe (R-Tex). The summary of the bill reads:

Master Limited Partnerships Parity Act – Amends the Internal Revenue Code, with respect to the tax treatment of publicly traded partnerships as corporations, to expand the definition of “qualifying income” for such partnerships to include income and gains from renewable and alternative fuels (in addition to fossil fuels), including energy derived from thermal resources, waste, renewable fuels and chemicals, energy efficient buildings, gasification, and carbon capture in secure geological storage.

The bill seeks the same treatment for certain renewable energy projects as that given to fossil fuel companies. In principle, this is a great idea, but I have argued in the past that not all renewable energy projects would benefit from such a change. For example, MLPs tend to attract investors seeking steady income. Certain projects — advanced biofuel projects for example — are unlikely in my mind to provide it. Many of the advanced biofuel projects have shed 90 percent of their value over the past three years, and profitability isn’t on the horizon. Such a company isn’t going to attract the typical MLP investor.

Solar projects, however, may represent the exact type of project that could benefit from MLP status. A solar project with an attractive, long-term power purchase agreement (PPA) would be similar to a midstream MLP with long-term fee-based contracts. This is very different from a biofuel offtake agreement, since in many cases the biofuels aren’t yet economically viable and hence can’t benefit from an offtake deal structure. In the case of solar, the cost of production can be estimated, and it has continued to fall over the years. Thus solar, wind, geothermal, biomass combustion — all of the current commercially available renewable power production options — could benefit greatly from MLP status.

Unfortunately, a change in the tax status seems unlikely. This is amazing given that the bill has bipartisan support, and is favored by renewable energy companies and fossil fuel companies alike. But there are no hearings scheduled, and really nothing in the news about it. Nobody in Congress seems to be pushing it. The odds of passage of the MLP Parity Act in this Congress have been estimated to be only 1 percent.

Back in November the bill’s lead sponsor, Sen. Coons, announced the co-sponsorship of senators Mary Landrieu (D-La) and Susan Collins (R-Maine). They join senators Jerry Moran (R-Kan), Debbie Stabenow (D-Mich), and Lisa Murkowski (R-Alaska). That is a powerful bipartisan group that should be able to get this bill passed. The chance of passage for the MLPPA would improve if enough people pick up the phone and call their representatives about it — especially if your representative happens to be one of those mentioned above.

Q: Would you comment on RGP and SPH?

Regency Energy Partners (NYSE: RGP) is engaged in the the gathering and processing, contract compression, contract treating, transportation, fractionation and storage of natural gas and natural gas liquids. Regency operates in the most prolific shale plays and rich gas formations in the US including the Haynesville, Eagle Ford, Barnett, Fayetteville, and Marcellus shales as well as the Permian Delaware basin.

RGP has been a long-term holding in the MLP Growth Portfolio, returning nearly 25 percent in 2013 while paying a dividend yield above 7 percent. The partnership has been on an acquisition spree lately. Less than three months after unveiling a $5.6 billion buyout of Appalachia-focused gatherer PVR Partners (NYSE: PVR), Regency announced that it would spend $1.3 billion on the midstream assets of Eagle Rock Energy Partners (Nasdaq: EROC), one of the MLP sector’s biggest 2013 busts. RGP will also buy Hoover Energy Partners’ midstream assets for $290 million.

The purchases expand Regency’s footprint in the Texas panhandle, east and west Texas and are adjacent to Regency’s own gathering systems, promising increased efficiencies of scale and other cost savings.

The purchases will be financed with debt and the issuance of Regency units worth nearly $700 million, roughly 13 percent of the current market capitalization, with general partner Energy Transfer Equity (NYSE: ETE) buying $400 million.

However, at this point we have turned cautious on new purchases of RGP. Aside from the usual integration risks, debt leverage remains high and the new unit issuance to finance the latest deal will disproportionately benefit Energy Transfer Equity via the latter’s incentive distribution rights.

I discussed the propane distributors two weeks ago in Searching in Vain for Cheap Propane. Suburban Propane Partners (NYSE: SPH) markets and distributes propane, fuel oil and refined fuels, and also markets natural gas and electricity in deregulated markets. The partnership serves approximately 750,000 residential and commercial customers through some 300 locations in 30 states (primarily on the east and west coasts).

But because SPH is more involved in the retail end of propane instead of the production/logistical side, it has been significantly outperformed by NGL Energy Partners (NYSE: NGL) and Ferrellgas Partners (NYSE: FGP). In short, the latter two are the ways to play higher propane prices, whereas SPH will see much less benefit from higher-priced propane.

Q: Golar (GMLP) has been doing well lately after an up/down and eventually flat year in 2013.  While sometimes diverging TGP performed about the same. Thoughts on any catalyst this year that might help GMLP start to trend up consistently?

There was another question in the chat about Golar LNG Partners (Nasdaq: GMLP), and I think part of my answer is worth repeating. According to the National Association of Publicly Traded Partnerships, there are seven partnerships in the Marine Transportation category. Of those seven, five have a footnote that reads “Organized and headquartered outside the US. Although organized as a partnership, has elected to be taxed as a corporation in the US and will furnish 1099s rather than K-1s. Some income will be treated as a currently taxable dividend, some as return of capital.”

Golar is one of those MLPs that has chosen to pay income taxes as a corporation. This avoids the hassle of dealing with K-1s in tax season, but it also gives up some of the tax advantages.

The two Marine Transportation MLPs that are taxed as MLPs are Dynagas LNG Partners (Nasdaq: DLNG) and Teekay LNG Partners (NYSE: TGP). The latter has 29 LNG carriers, and has already agreed to charter two of its ships to the first US LNG export venture. We actually favor TGP over GMLP.

Back to the initial question, the primary catalyst on the horizon that should benefit the liquefied natural gas (LNG) carriers will be the upcoming completion of LNG export terminals. As Cheniere Energy Partners (NYSE: CQP) prepares to begin shipping LNG from its Sabine Pass LNG export terminal, and follows with another LNG terminal in Corpus Christi, Tex.,  investors should warm to LNG carriers as a significant investment opportunity. You may have to be a little patient as CQP’s first terminal isn’t scheduled to start shipping until late 2015 or early 2016. But there should be a lot of press coverage as project completion draws near.

Investors will then become more aware of the six applications for approval by the Federal Energy Regulatory Commission (FERC) — including two in Oregon (the only two US West Coast export terminals being considered). In total, 13 LNG export projects have been proposed to FERC, and another 11 sites identified by project sponsors.

The US Department of Energy (DOE) also has to approve the projects, and in addition to the six applications already approved by the DOE another two dozen are under review. Approving all would give the US a total export capacity of  35.6 billion cubic feet per day (equivalent to just over half the natural gas production in the US in 2012) — but certainly all of the projects under review will not be completed.

So if you are looking for a catalyst, I think that will be it. It will be general awareness of the huge opportunity as LNG shipments begin to take shape.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

A Love Letter to Energy Transfer

Jana Partners is a well-regarded value-oriented hedge fund with $8.7 billion of assets under management, while we’re a small newsletter team. But we do have at least one thing in common: our fondness for Energy Transfer Equity (NYSE: ETE), the best fourth-quarter performer in Jana’s portfolio as well as ours. We’ve netted a total return of 53 percent since recommending ETE in June.

Energy Transfer batted leadoff among the 13 portfolio positions highlighted in Jana’s January letter to investors, and the firm was effusive in praising the leadership of founder and CEO Kelcy Warren, not least for his wily grab of the Lake Charles LNG terminal as part of the Southern Union acquisition.

The approved LNG export project that will be sited there promises to become a multi-decade cash cow for ETE, supporting distribution growth that, according to Jana (and us in June) should compound at an annual rate of 15 percent over the next five years.

As Jana notes, it was ETE’s detailed financial projections of the likely Lake Charles cash flows, released in November, that really turbocharged the rally. ETE estimated lifetime project cash flows of $900 million from Lake Charles, and Jana suggests that at current peer valuations and before discounting for net present value, this jackpot might be worth as much as $55 per unit. Meanwhile, analysts who mostly missed the boat still ascribe only about half that value to the project, according to Jana.

Jana’s stake in ETE was a relatively modest $5.6 million at year-end, though it grew over the course of last year.

The hedge fund expects the unit price to move higher still in response to such near-term catalysts as the IPO of a new subordinate LNG MLP that would actually own the Lake Charles assets and provide a market valuation for that project, as well as continued acquisitions by ETE affiliates Energy Transfer Partners (NYSE: ETP), Regency Energy Partners and Sunoco Logistics Partners (NYSE: SXL), which will serve to increase ETE’s incentive distribution rights.

We agree, and are raising our split-adjusted buy below target for ETE to $46.    

— Igor Greenwald

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