Thoughts on the NAPTP’s Annual MLP Investor Conference

At the click of a button, stock screens can sift through tens of thousands of companies by their numbers. Unfortunately, these eminently useful tools fail to consider a key intangible: quality of management.

Last week, the Energy & Income Advisor team attended the National Association of Publicly Traded Partnerships’ (NAPTP) annual MLP Investor Conference in Ponte Vedra, Fla.

Although the presentations at this conference usually contain few surprises, the opportunity to get a read on management during break-out sessions and one-on-one meetings is priceless.

In keeping with the NAPTP’s past conferences, Enterprise Products Partners LP’s (NYSE: EPD) CEO Michael Creel delivered the conference’s marquee address and provided investors with the most complete industry overview.

Creel’s presentation revisited some of the themes from the blue-chip master limited partnership’s (MLP) Analyst Day:  

• North America’s major shale oil and gas fields have reserve lives of 30 years to 80 years; and
• The company’s forecast calls for US crude-oil production to increase 50 percent, natural-gas output to climb 25 percent and natural gas liquids to grow almost 80 percent by 2020.

If hyrocarbon production ramps up to these levels, projections for $81 billion in spending on pipelines, storage, processing and other midstream capacity likely will prove conservative.

But not every MLP is as well-positioned as Enterprise Products Partners to profit from this trend.

For example, Boardwalk Pipeline Partners LP (NYSE: BWP), Eagle Rock Energy Partners LP (NSDQ: EROC) and Natural Resource Partners LP (NYSE: NRP) all slated their distributions this year. And they likely won’t be the last to scale back their payouts to unitholders.

In The Most Important Day of the Year for Income Investors, we explained one of our goals for the conference: to identify an undervalued turnaround play akin to Buckeye Partners LP (NYSE: BPL), which rallied by 63 percent last year after returning to distribution growth.

Like the cutting crew of Boardwalk Pipeline Partners, Eagle Rock Energy Partners and Natural Resource Partners, Buckeye Partners also stopped raising its distribution in 2012. But the MLP’s management team had a credible plan to right the ship and executed this strategy to perfection.

Heading into the conference, we put together a list of 10 MLPs whose distribution growth had stalled and planned to scrutinize these names for potential value. The challenge was deciding whether these names had what it takes to grow their payout and shore up their coverage ratios.

Unfortunately, we found most of the candidates severely wanting.

To be sure, the market’s harsh reaction to Boardwalk Pipeline Partners, Eagle Rock Energy Partners and Natural Resource Partners’ distribution cuts provides ample evidence as to why this move is a last resort for most MLPs.

Although a reduced distribution brings real savings and can shore up the company’s balance sheet, plunging unit prices limit the appeal raising equity capital.

And the lingering aftereffects could force the distribution cutter to rely more heavily on debt financing, a competitive disadvantage when funding acquisitions or organic-growth projects.

The upshot is that distribution cuts are more likely to derail MLP comebacks than to ignite them. And if what we heard at the NAPTP conference is any indication, management teams at marginal MLPs will do almost anything to avoid slashing the payout.

Investors must focus on the ways and means to identify the next Buckeye Partners–and avoid the next Boardwalk Pipeline Partners.

Two MLPs at the conference presented credible turnaround stories that could reward investors capital gains of at least 50 percent. Investors who get in ahead of the crowd can also lock in significantly higher yields. (See MLP Mania: Takeaways from the NAPTP’s Annual Investor Conference.)

A third candidate appears in the Model Portfolios of all three of our advisories: Enbridge Energy Partners LP (NYSE: EEP).

For a while, we were the only voice backing the MLP. But the firm’s recent investor day prompted analysts from Credit Suisse (Zurich: CSGN, NYSE: CS) and Simmons & Company, bolstering the stock price to its highest level since summer 2013.

The MLP appears to be closing in on delivering distribution growth of 2 percent to 5 percent this year after an extended fallow period. Management expects this growth rate to accelerate to between 6 and 8 percent per annum by 2018.

Organic-growth projects will fuel much of this turnaround story.

Among the opportunities on the docket, replacing the aging Line 3 pipeline will effectively double this system’s capacity and, unlike the controversial Keystone XL, won’t require the US State Dept’s approval.

This project will improve system safety by leaps and bounds while reducing pipeline-integrity costs by about $1.1 billion between through 2017. More important, customers have snapped up capacity on the new Line 3, agreeing to pay up to $100 million in penalties to exit these agreements.

The assistance of Canadian midstream giant Enbridge (TSX: ENB, NYSE: ENB), which owns the general-partner interest and an 18.3 percent equity stake in Enbridge Energy Partners, helps to alleviate the burden of financing the project.

And once units of Enbridge Energy Partners appreciate to a normal valuation, Enbridge will start to drop down assets to MLP.

Enbridge Energy Partners sports an enterprise value (equity plus debt) to earnings before interest, taxes, depreciation and amortization (EBITDA) of 16.4-to-1.

By comparison, Enterprise Products Partners sports a multiple of 18.8, Genesis Energy LP’s (NYSE: GEL) debt and equity amount to 33.1 times its cash flow and Magellan Midstream Partners LP’s (NYSE: MMP) enterprise value is 21.6 times its cash flow.

With Enbridge Energy Partners’ first-quarter EBITDA up 20.5 percent year over year, the MLP’s turnaround story and push for distribution growth appears to well on its way.

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