Introducing the Annual Checkup
“When Wall Streeters tout EBITDA as a valuation guide, button your wallet.”
— Warren Buffett in Feb. 28 letter to Berkshire Hathaway shareholders
It’s a good thing so many investors are willing to flout this particular nugget of wisdom from the Oracle of Omaha. Were they to take Buffett’s advice, the MLP sector might have to shut down for lack of equity capital.
Energy would stop flowing through pipelines, leaving the lights to flicker and die. And in the darkness a disembodied monotone would drone: “Adjusted for the end of the world, EBITDA rose 12 percent.”
All kidding aside, swell earnings before interest, taxes, depreciation and amortization do get used a lot by MLPs as proof that things are going great. Often enough, they are. But for an industry rapidly expanding its asset base by taking on debt and issuing equity, absolute increases in revenue and profits are to be expected.
What these can’t do is measure the creation of value for limited partners and shareholders, any more than a yield can. That value also depends on efficiency, leverage and reliability, along with valuation and business fundamentals.
If we could distill all that into a reliable numerical rating things would be so much easier. Unfortunately, many of the judgments involved are unavoidably subjective.
But while there’s no single magic formula, we certainly have plenty of numbers at our disposal, data points that allow outsiders to size up MLP elephants from a variety of angles.
I’m just back from just such a safari, bearing a variety of stats for each of our 31 portfolio recommendations (plus one that’s no longer recommended as of today. The full spreadsheet aggregating all of this information can be downloaded here: https://www.investingdaily.com/res/images/mlppportfoliostats.xlsx. A simplified table is below.
But before we dive into the numbers, a couple of cautions. These statistics represent a snapshot or, at best, change during a single Earth orbit around the sun, and as such should not be extrapolated into a long-term trend. Nor are they a substitute for thinking about what might go wrong that’s not reflected in the numbers, or about the strategic positioning of each business, whether geographically or competitively.
Except for market capitalization data, the numbers were mined from filings with the Securities and Exchange Commission, and sometimes crunched to produce comparable figures for entities with unique situations and reporting practices. Below the table and the spreadsheet you will find footnotes logging such instances. So, without further ado:
Distribution yield based on latest announced distribution, annualized, divided by unit price as of March 5-7, 2014
Distribution growth based on latest announced distribution vs. year-ago payout
Distribution coverage is for all of fiscal 2013
Revenue and EBITDA growth is for fiscal 2013 vs fiscal 2012. EBITDA is earnings before interest, taxes, depreciation and amortization.
Debt/EBITDA is latest gross long-term debt divided by 2013 EBITDA
EV/EBITDA is market valuation as of March 5-7, 2014, plus latest debt divided by 2013 EBITDA. EV is enterprise value, the sum of net debt and market capitalization.
Income protection includes fee-based income %, hedging profile, contracted output, etc.
IDRs list general partner’s incentive distribution rights on quarterly basis, with current tier shown first
2014 outlook based on management guidance
1 AHGP financials other than distribution yield and distribution growth consolidated with operating subsidiary ARLP
2 XTXI financials other than distribution yield and distribution growth consolidated with operating subsidiary XTEX; income protection, IDRs and 2014 outlook based on EnLink merger effective March 7.
3 ETE revenue growth based on distributions from subsidiaries; EBITDA measures based on distributions from subsidiaries minus selling, general and administrative expenses
4 ETP revenue growth adjusted for acquisitions
5 NMM EBITDA change adjusted for non-cash accounting benefit in 2012
6 OCIP is a recent IPO that has not yet reported results
7 SEP revenue and EBITDA adjusted for recent asset dropdown
8 TRGP and NGLS revenue growth, EBITDA growth and debt/EBITDA on consolidated basis; EV/EBITDA on standalone basis
9 TGP EBITDA and debt/EBITDA estimated on basis used by other MLPs
10 UGI financials include APU; EBITDA estimated based on net operating cash flow
11 WMB EBITDA and revenue consolidated with WPZ; EBITDA based on total segment profit plus DD&A (depreciation, depletion and amortization.)
The distribution yield is the only MLP statistic quoted more often than EBITDA, and in our portfolio it ranges from 10.8 percent for Atlas Resource Partners (NYSE: ARP) to 2.5 percent for Targa Resources (NYSE: TRGP ) and UGI (NYSE: UGI).
Atlas is a natural gas focused driller, and is quite unusual in combining a double-digit yield with the promise to grow its distribution 20 percent for a second year in a row. Of course, despite extensive hedges, its ability to keep delivering such gains depends heavily high natural gas prices.
Meanwhile, though Targa and UGI are both corporations they have very different charms. Gas processor Targa plans to follow last year’s 33 percent dividend growth with an increase of at least 25 percent this year, and has a lot of debt on the balance sheet of its sponsored MLP Targa Resource Partners (NYSE: NGLS). UGI is a regulated gas utility and the general partner of top propane distributor AmeriGas (NYSE: APU). Its 4% dividend growth rate might seem pedestrian compared with those at Targa or Atlas, but UGI paid uninterrupted dividends for 130 years, and has increased its payout for 27 straight. It’s also growing earnings per share at a double-digit rate and reinvesting some of that in overseas expansion.
Targa’s not even the portfolio champ when it comes to the largest year-over-year payout increases; Western Refining (NYSE: WNR) has more than doubled its quarterly dividend from a very modest one a year ago.
Other hyper-sharers include Crosstex Energy (NYSE: XTXI) (which was merged into EnLink Midstream (NYSE: ENLC) as of this week), with a 25% hike in 2013 and a plan to raise its dividend by 63% this year; EQT Midstream Partners (NYSE: EQM), which should come close to duplicating last year’s 31 percent distribution jump; Magellan Midstream Partners (NYSE: MMP), with a 17% payout boost last year and a goal of 20% in 2014 and 15% in 2015; Sunoco Logistics Partners (NYSE: SXL), which is continuing to grow its distribution at a 22% clip; and Williams (NYSE: WMB), which aims for 22% after a 19% hike last year.
Not coincidentally, you will find many of these names on the new list of the most enthusiastic MLP Profits recommendations. (see Best Buys)
But distribution coverage — the extent to which the payout is covered by recurring cash flow — matters too, and critics contend that MLPs tend to understate their long-term maintenance spending needs to juice that calculation. In any case, only Crestwood Midstream Partners (NYSE: CMLP) fell dramatically short with a coverage ratio of 0.82 last year, and it gets a mulligan in light of its merger and series of acquisitions. Crestwood hoped to catch up this year even as it continues to raise the payout.
But there’s more room for error at Alliance Holdings (Nasdaq: AHGP) and Enterprise Products Partners (NYSE: EPD), both with a coverage cushion of at least 50 percent, and even more payout slack at Sunoco, UGI and Western.
Of course it’s often possible to grow more rapidly if one is wiling to take on a lot of debt, but Alliance and Western don’t have that problem and neither does distressed debt specialist Oaktree Capital Group (NYSE: OAK), perhaps because it understands all too well the hazards of over-borrowing. EQT Midstream has no debt at all.
In contrast, Crestwood, Genesis Energy (NYSE: GEL), MarkWest Energy Partners (NYSE: MWE) and Teekay LNG Partners (NYSE: TGP) have fairly stretched balance sheets.
Based on the EV/EBITDA valuation metric, Western and Oaktree look cheap, but of course they’re not midstream pipeline operators. Energy Transfer Partners (NYSE: ETP) is one, however, and it appears to have been unfairly overshadowed by its general partner Energy Transfer Equity (NYSE: ETE), with investors paying a juicy premium for ETE’s incentive distribution rights and stronger growth prospects.
ETP is even cheaper than Kinder Morgan Energy Partners (NYSE: KMP), another giant with a heavily incentivized general partner and more recent growth concerns, albeit ones that are also likely to be overcome.
Having all of these numbers in one place should make for easier comparisons and a better understanding of the risks as well as the rewards each of these businesses offers.
Stock Talk
Add New Comments
You must be logged in to post to Stock Talk OR create an account