On Cloud Nine

Two months ago in this space, we unveiled a ranked list of our nine top portfolio Best Buys, and now an update seems in order.

The good news is that this investment basket, containing numerous holdings added relatively recently and recommended repeatedly since, is not merely outperforming its sector and the market. It’s destroying them.

Through May 7, MLP Profits’ nine top picks were up an average of 20.3 percent since the beginning of the year, versus 1.6 percent for the S&P 500, 6.3 percent for the Alerian MLP Index and 8 percent for the Energy Select Sector SPDR (NYSE: XLE). 

140509mlppbestbuys
This is comforting confirmation that we remain on the right track in assessing the business fundamentals of the midstream energy industry as well as the preferences of other MLP investors. It’s also a hopeful sign for the remainder of the year because, while security prices seldom rise in a straight line, the strong momentum our favorites have built up over the last year — and in many cases the last decade or more — should remain a powerful tailwind.

The downside, and it’s a high-quality problem, is that four of the nine Best Buys have at this point exceeded the buy targets laid out just two months ago, and several others are right below their limits.

This is not the most opportune time to keep raising the bar, what with MLPs facing weak seasonal tendencies and some of the market’s riskier precincts broadcasting distress signals. As long as the fundamentals remain solid we’ll raise the buy targets for every one of our current Best Buys, just not right now.

Now is a good time to point out that No. 8 Best Buy EnLink Midstream (NYSE: ENLC) remains 10 percent below its buy limit and is poised to benefit tremendously over the long-run from sponsorship by the large and expanding driller Devon Energy (DVN). ENLC’s forecast dividend for 2014 works out to a relatively modest 2.2 percent yield at the current price, but is expected to grow 20 percent annually, with dropdowns to the subsidiary partnership potentially providing further upside. Buy ENLC below $40.

Ninth-ranked AmeriGas Partners (NYSE: APU) is still 13 percent below its limit, already yields nearly 8 percent and is growing its distribution nearly  5 percent annually thanks to steadily expanding propane distribution margins. Buy APU below $51.

Top-ranked Best Buy Enterprise Products Partners (NYSE: EPD), No. 4 Energy Transfer Equity (NYSE: ETE) and No. 5 Williams (NYSE: WMB) also remain buys at current prices. Buy EPD below $75, ETE below $52 and WMB below $46.

LNG+IPO+MLP=OMG

Is there anything out there worth buying that we haven’t already recommended?

The original plan was to argue that there is not, using the fresh example of the GasLog Partners (NYSE: GLOP) to cluck about lofty MLP valuations. The operator of liquefied natural gas (LNG) carriers opened for public trading on May 7 23 percent above its offering price.

But that plan didn’t survive a deep dive into GLOP’s financials. To be clear, GasLog Partners could prove a lousy investment over the long haul at twice its tangible book value and an enterprise value of nearly 25 times the distributable cash flow forecast over the next year.

On the other hand, it bears many of the hallmarks of other new MLPs that have quickly won over investors with rapid growth. We’re adding it to the Aggressive Portfolio in quest of short-term capital appreciation rather than long-term value.

GasLog Partners is an offshoot of GasLog (NYSE: GLOG), which is in turn an outpost of the century-old  family shipping empire run by the Greek-American tycoon Peter Livanos. In the two years since the company went public it has doubled the size of its LNG shipping fleet as well as its share price.

GasLog Partners is starting out with just three of its parent’s 14 current ships, but with options to purchase 12 more including several currently under construction and the parent company’s commitment to turn the MLP into the primary owner of its carriers under long-term charters.

Most of GasLog’s vessels have been chartered by leading LNG trader and its longtime business partner BG Group (London: BG, OTC: BRGYY), with energy giant Royal Dutch Shell (NYSE: RDS-A) on board as a secondary client.

It’s a profitable and highly specialized business set to get a major boost in a couple of years as big LNG export projects in Australia, Oceania and the U.S. start to come on line. But in the meantime delays have kept the global LNG charter market stagnant for the last two years and the next two years promise more of the same as 58 large new LNG carriers hit the water in anticipation of a shipping boom later in the decade.

For their investment at 25 times of the forthcoming annual distributable cash flow, limited partners will run the risk that all these new ships will drive down charter rates in the near-term, and additionally that the surge in LNG supply after 2017 reduces intercontinental gas price differentials and undermines the rationale for the trade. Additionally, GLOG management and directors could favor Livanos at the expense of his limited partners. These are all risks disclosed by the partnership in the IPO prospectus filed with the Securities and Exchange Commission.

It’s a great deal for GasLog, which contributed assets with a tangible value of $146 million in exchange for cash and equity now worth more than twice as much, securing a permanent source of cheap capital for financing continuing growth in the process.

But the limited partners have been provided with a decent yield and a clear growth path. The minimum promised distribution of $1.50 per GLOP unit over the next year works out to a prospective yield of 5.7 percent, with a projected 1.12x coverage. And all those options on the vessels already hauling LNG and others not yet built promise rapid growth in the distribution, albeit with likely dilution from the secondary offerings likely to accompany such dropdowns.

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Source: GasLog Partners

It’s a much better deal for Peter Livanos than for Joe Investor, but this is nothing new in MLP land and to this point hasn’t prevented limited partners from making money. At 5.7 percent, the yield will not be much lower than the 6.3 percent provided by rival LNG shipper and Growth Portfolio holding Teekay LNG Partners (NYSE: TGP) which is not expanding nearly as fast nor providing much, if any, excess coverage. GLOP’s yield will also be considerably higher than that of refinery logistics MLP Phillips 66 Partners (NYSE: PXSP) or of the midstream operator (and our No. 7 Best Buy) EQT Midstream (NYSE: EQM), which also have sponsors willing to deliver lots of asset dropdowns.

We have to deal with the market as we find it and not some idealized bargain bin brimming with great deals for yield seekers. And the market we have has proven quite willing to reward moderate yields from distributions set to grow rapidly. GasLog should be capable of growing its distribution by 15 to 20 percent annually. And the new partnership’s involvement in the red-hot LNG space should only add to its near-term appeal. Buy GLOP below $30 and hope for quick gains big enough to render the question of its long-term value less urgent.

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