Spectra: Value in MLPs

11/26/2014 7:00 am EST

Focus: MLPS

Josh Peters

Editor, Morningstar DividendInvestor

It’s not unusual for MLPs to trade up and down in tandem with the stocks of energy producers, even though most MLPs’ cash flows are much less sensitive to changes in commodity prices, observes Josh Peters of Morning DividendInvestor.

The group is also subject to occasional, usually temporary, but potentially disorienting losses of liquidity: A hasty liquidation by just a single hedge fund can cause widespread intraday losses of 5% or more.

But the more growth that is anticipated by MLP valuations, the more dependent those valuations become on high prices for oil and natural gas over the medium-term.

Lower prices are bound to mean less drilling activity, and therefore, fewer expansion projects.

Despite very steady cash flows—almost all revenue is locked in for years at a time under fixed contracts with shippers—the unit price of Spectra Energy Partners (SEP) as been on a wild ride of late.

After updating our forecasts for recently generated cash flows and additional expansion projects a few years out, our fair value estimate rose $4 to $62 a unit, even as the unit price was in the process of dropping more than 10% for the month.

This created one of the most compelling opportunities among high-yield equities that I’ve seen in a long while, so I boosted the Harvest’s weighting in SEP slightly north of 7%.

I also think parent company Spectra Energy (SE) is a buy too, particularly for accounts that can’t or prefer not to own master limited partnerships.

All else being equal, though, I prefer SEP as it represents the organization’s most attractive assets and provides a higher current yield.

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