MLP Can’t Keep the Oil, or Cash, Flowing Fast Enough

09/16/2011 4:04 pm EST


Jim Jubak

Founder and Editor,

I think you can do better.

Yes, Energy Transfer Partners (ETP) pays a current yield of 8.2%. But with a master limited partnership like this, what I want to see is the potential for solid increases in cash distributions over time. And on that front, Energy Transfer Partners looks like a laggard.

I’m selling this master limited partnership out of Jubak’s Picks as of today.

Standard & Poor’s, which gives this stock a buy rating, forecasts that cash distributions will climb just 1.7% in 2011. That trails S&P’s forecast of 7.1% growth in cash distributions for Magellan Midstream Partners (MMP), for example.

In the realm of growth in real cash, and not in projected cash, Energy Transfer Partners showed no increase in distribution in the second quarter of 2011, versus a 7.2% increase from Magellan Midstream Partners and a 4.5% increase for ONEOK Partners (OKS).

(Energy Transfer Partners was—until today—a member of my Jubak’s Picks portfolio; Magellan Midstream and ONEOK are members of my Dividend Income portfolio.)

This doesn’t look like a short-term problem, either. Barclays forecasts that the distribution increase at Energy Transfer Partners will grow at a 3.1% compounded annual rate from 2010 to 2015, compared to 5.1% for its peers among MLPs.

What’s the problem? Actually it seems to be problems, plural.

About 45% of revenue at Energy Transfer Partners comes from intrastate pipelines, and that sector is growing more slowly than the interstate pipeline business. In addition, the company’s cost of capital is about 2.5 percentage points higher than its peers.

Master limited partnerships grow by borrowing money and then buying new assets with that cash—since the partnerships distribute almost all their earnings to unitholders, they don’t have retained earnings to invest. That higher cost of capital puts Energy Transfer Partners at a growth disadvantage going forward.

The unit price has been in a downtrend for much of 2011, and is now flat for the year. That trails the 20% to 30% price appreciation of ONEOK and Magellan Midstream. On a total-return basis, I think you’ll do better going forward with those other two master limited partnerships.

Or, you can take a look at one of the dividend stocks I wrote about in my post earlier today.

Full disclosure: I don’t own shares or units of any of the companies or partnerships mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own units of any partnership mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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