This MLP Fell for the Right Reasons

Focus: ENERGY

Jim Jubak Image Jim Jubak Founder and Editor, JubakPicks.com

The company dropped on news it was going to sell more units, but that often means cash is being raised for a big opportunity, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Western Gas Partners (WES) dropped 4.96% on June 19, on news that the master limited partnership had filed to sell 5 million units this Friday, June 22, at a price of $43.88 a unit.

The units closed at $43.15 on June 19. (Western Gas Partners is a member of my Jubak’s Picks portfolio.)

Now I understand why stocks (or in this case, master limited partnerships) fall when the company decides to sell more shares or units. The current stream of profits going to investors will in the future have to be spread over 5 million more units. That’s dilution of about 5.2% on the 95.78 million units outstanding.

And certainly nobody wants to pay more for units—they closed at $45.40 the day before the announcement—than the new units being sold command.

But master limited partnerships are a little bit different than your normal, run of the mill stock. I think the market’s reaction to the new offering creates an attractive opportunity for investors looking for income now and income growth in the future.

Because master limited partnerships distribute most (and sometimes more than all) of their earnings to investors, they don’t have much in the way of retained earnings to reinvest. (Frequently, master limited partnership distributions exceed earnings, since the distributions are based on cash flow and take advantage of depreciation and other items that would lower taxable income.