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Holly Energy Partners on Portfolio Probation
06/02/2014 5:00 pm EST
Even though this energy MLP recently announced its thirty-eighth consecutive quarterly increase, MoneyShow's Jim Jubak feels there is cause for concern, particularly in respect to growth and lack of an abundance of drop downs.
On April 24, 2014, Holly Energy Partners (HEP) declared a cash distribution of 50.75 cents per partnership unit for the first quarter of 2014. That was an increase from the 50 cents distributed to unit holders in the fourth quarter of 2013. This 6.3% increase, the company's thirty-eighth consecutive quarterly increase, is exactly what a dividend income investor wants to see from a master limited partnership. Holly Energy Partners is a member of my Dividend Income Portfolio. (The distribution was paid on May 15 to unit holders of record on May 5.)
But despite that increase in payout and despite the master limited partnership's current 5.76% yield, I'm putting this portfolio holding on probation. I didn't like everything I heard in the Holly Energy Partners first quarter report on May 1.
For the quarter, distributable cash flow climbed 29% compared to the first quarter of 2013. Net income climbed to $24.1 million in the first quarter of 2014, compared to $18.4 million in the first quarter of 2013.
It's the “compared to” part of those results that gives me some pause. The first quarter of 2013 was a bad quarter for Holly Energy and the growth from that quarter is, as the company notes, attributable to higher pipeline and terminal volumes, as pipeline shipments returned to normal levels after operational “constraints” at parent HollyFrontier's (HFC) Navajo refinery in the fourth quarter of 2012 and after maintenance-related reductions at the Navajo and Big Spring refineries in the first quarter.
That means the big gain from the first quarter really only brought revenue ($87 million in the first quarter of 2014) back to where it was in the fourth quarter of 2012 ($86 million). EBITDA (earnings before interest, taxes, depreciation, and amortization) at $48 million for the first quarter of 2014 were still below the $64 million in the fourth quarter of 2012.
The master limited partnership has another quarter (June 2014) of easy comparisons but then I start to worry about growth.
That worry is intensified by the lack of a big pipeline (no pun intended) of assets ready for drop down from parent HollyFrontier to Holly Energy. Buying assets from a parent using cash raised (very cheaply, currently) in the financial markets is one way that a master limited partnership grows cash flows. And I don't see much in the way of drop downs coming in Holly Energy's direction.
That leaves growth in distributable cash pretty much up to organic growth. Holly Energy's prospects there aren't totally grim—the company has solid exposure to the Utica and Niobrara shale basins that look to be good candidates for the next round of development and production in the US energy from shale boom.
But I do want to keep a close eye on the company's growth prospects to the degree that they're revealed in the second quarter financial report. The yield on Holly Energy is attractive, but the price appreciation has lagged over the last year. The 12-month total return is just 3.8% as the units gave back in price some of what they yielded in dividends. So far in 2014, the price appreciation has been a much better 12.4%, but all of that is a result of a 16.8% rally from April 17 to June 2.
I don't especially want to hold on for the dividend if I'm going to give back all—or most—of that price appreciation.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed until the end of May, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Holly Energy as of the end of March. I closed the fund at the end of May. I anticipate rebuilding my personal portfolio over the next few months. As I add names to that portfolio, I will disclose them here, but at the moment, my own portfolio is totally in cash.
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