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Author: Reitnut Big red star, 1000 posts Top Favorite Fools Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77713  
Subject: OT: EEQ/EEP Date: 2/21/2013 9:22 PM
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I might have mentioned on our Board that I own EEQ, which is the Enbridge MLP that pays its dividend in stock rather than cash, and thus avoids the UBI or K-1 issues that we normally encounter with MLP investments. Its “sister” MLP, with regular cash distributions and K-1s, is EEP.

Over the past five years, EEQ has performed pretty well, easily beating its benchmark, the Alerian MLP index. See http://finance.yahoo.com/q/bc?t=5y&s=%5EAMZ&l=on&... However, over the past 12 months it’s been an entirely different story. http://finance.yahoo.com/q/bc?s=%5EAMZ&t=1y&l=on&... In 2013 the stock is down, but by only 1%. It took a big hit last Friday (down 2.6%), rebounded earlier this week, then fell off with the broader market.

I spent a bit of time trying to figure out what was ailing EEQ, with a view towards deciding whether to buy more, hold or dump it. The first issue is that EEQ has missed its guidance and consensus estimates – badly. Q4 adjusted net income fell from $.32 to $.18 (consensus was $.25) and, for the year 2012, declined from $1.39 to $.99. The company acknowledges that distributable cash flow (a term that’s not defined in the press release) was 70% of the actual rate of distribution of $2.17 per share – so the company is significantly overpaying its dividend.

What’s the culprit behind these disappointments? There are several concerns. Perhaps the most significant is that EEQ is fairly sensitive to natural gas and natural gas liquids (NGL) prices; these have been weak, due to oversupply, and this has caused EEQ to badly miss its earnings projections and consensus estimates. For Q4, adjusted operating income per share was down 18%. Management professes not to worry, claiming that “the partnership’s distributable cash flow growth will begin to accelerate once our accretive growth projects (they are referring to pipeline expansions) enter service.”

Well, maybe. But for now, they are paying $2.17 per share in distributions, but “distributable cash flow,” by the company’s own estimates, is only $1.71. As we know, it is never a good sign when a company overpays its dividend like this, or when earnings in the basic business is declining. Shareholders should not expect an increase in natural gas or NGL prices over the near term, and must count on a very successful pipeline expansion.

EEQ isn’t exactly a cheap stock, selling (at $28.61) for 16.7x the company’s estimate of its distributable cash flow. And we should keep in mind that income per share (and even adjusted income per share) is a lot less than “distributable cash flow,” which presumably adds back depreciation and makes other adjustments that are not apparent from the company’s press release or 10-Q. I am not smart enough to be able to compare the “distributable cash flow” of an MLP with the AFFO of a REIT; the latter is a measure of truly free cash flow, but I don’t really understand how the former is calculated. As I mentioned, neither EEQ’s nor EEP’s Q4 press release defines that term; they discuss other metrics such as net income per share, adjusted income per share, and ebitda.

Another concern is debt and the need to raise capital. From looking at the Q4 conf call transcript, it seems that EEQ/EEP needs to raise $7.5 billion through 2016 to fund their pipeline expansion plans. This is a large number in the context of the total equity market cap of both EEP and EEQ (about $9.5 billion). They will need to raise a lot of equity, along with more debt. Can they do it at reasonable prices? I don’t know. If one can rely upon Yahoo Finance figures, debt is $6B at EEP, or 42.2% of its total enterprise value. This isn’t troubling, but the leverage ratio will probably increase.

There is also a new issue: increasing competition from railroads, which are shipping LNG product at cheaper prices per mile from some of the company’s markets. There is a discussion of this in the Q4 conf call transcript and, based on the analysts’ questions, it seems to be a new concern. It is hard to assess whether this is a long-term, or just a short-term, threat.

I have never been a fan of consensus estimates or investment ratings. However, smoothing out a group of them may filter out excessively optimistic and pessimistic opinions. I think it’s interesting to note that EEP (the K-1 version of EEQ) ranks very near the bottom of MLP investment ratings as compiled by Thompson Reuters. See http://seekingalpha.com/article/553071-20-largest-pipeline-m... This, too, is a bit worrisome.

The bottom line is that, despite its high dividend yield of about 7.6%, I am not as comfortable with this stock as I once was. That high yield tells us a lot about investment safety; many other pipeline MLPs of similar size have dividend yields that are a lot less. For example, El Paso Pipeline Partners yields 5.8% and Plains All American yields 4.2%.

I have a very modest profit in EEQ, and have been earning a dividend yield of over 7% since I bought it. I decided to sell my EEQ. I like the pipeline industry, and MLPs generally, but there are very few effective ways to invest in them in IRAs, where the vast bulk of my investment assets are located, if one wants to avoid the UBI issue.

Yes, I know Kinder Morgan has an MLP that’s similar to EEQ. But I don’t like the fee structure between KMR and the general partner (KMI), which seems overly generous to the latter entity. I am not aware of any other MLP besides EEQ and KMR that clearly avoids the UBI issue, except for ETN notes and such. Any suggestions would be welcome. Thanks.

Ralph
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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73724 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/21/2013 10:26 PM
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<<< I am not aware of any other MLP besides EEQ and KMR that clearly avoids the UBI issue, except for ETN notes and such. Any suggestions would be welcome. >>>

Ralph:
I am pretty sure Line has another entity that avoids the UBI issue. I don't remember the symbol. I also wouldn't recommend it, as I believe I have read it has been under a short attack. If you ask your question on the Investor Village MLP board, you will probably get some responses:

http://investorvillage.com/smbd.asp?mb=5028&pt=m

Norm

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Author: CM001 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73725 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/21/2013 10:31 PM
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LNCO. LINE, Linn Energy sister. It just witnessed lots of drama from last Friday. :)

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Author: Valuemongeragain One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73726 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/21/2013 10:36 PM
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I can't add any particular insight to pipelines or MLPs in general, but natural gas and to a lesser extent petroleum are things I think I know.

Natural gas prices have been in a funk for several years now. After a year or so mostly in the $2's, they are now in the low $3's which still is not particularly profitable for producers. To make matters worse, NG prices have been so low for so long that most producers have burned through higher hedges that had been protecting them to some extent from the lower prices.

I review the following link every Thursday that lists U.S. natural gas storage numbers.

http://ir.eia.gov/ngs/ngs.html

Storage numbers, indicating the weekly draw typically from November through March and the weekly injection typically from April through October, are to me the sum of all supply and demand factors.

The first weekly report of this year blew the lights out taking over 200 bcf out of storage, this is unusual for a week in late December to early January when so many institutions are closed. The next 2 weeks while not as good, were still above the 5 year average. So after the first three weeks beating the 5 year average, the next 3 weeks have been been below the 5 year average.

Early this year, I looked at a lot of NG producers and all seemed overpriced or fully priced for a modest increase in NG prices. Last year I also looked at CHK when that company was beaten down due to some management issues, although it had a significant drop it didn't appear to me to be a great bargain.

Oil prices, although down $5 over the last week, are good enough to be quite profitable. I would focus on the Oils and not the NG producers.

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Author: CM001 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73727 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/21/2013 11:13 PM
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Norm,

There are detailed discussions on LINE on value hounds board that you may want to check out to get the facts on short attack.

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73728 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 8:26 AM
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<<< There are detailed discussions on LINE on value hounds board that you may want to check out to get the facts on short attack. >>>

I do not own LINE my self, I just mentioned it as an example of what Ralph was looking for. I do own KMP, SXL, WES and OKS. I have owned EPD and ETP in the past. They all have done well, but SXL and WES have been especially great investments for me. With discount brokerage fees so low, my understanding is, all one has to do is sell them and buy them back every few years and generally there won't be any IRA problems.
Norm

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Author: martinmoth Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73729 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 1:33 PM
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Ralph,

To the best of my understanding the following are safe to hold in an IRA and I hold a substantial position in all of them in my IRA.
EEQ
KMR
WMB
LNCO
I have in recent days added to my LNCO position when it briefly fell to under 37. There has been much recent discussion on the investor village MLP board about how LINE/LNCO accounts for its hedging. A number of analysts just reiterated their buy ratings and in the past three trading days LNCO price has spiked. For me LNCO is a buy and a longterm hold.
Also check out WMB. Its dividend is only 3.9% but expected to grow rapidly.

Martin

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Author: martinmoth Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73730 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 1:40 PM
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The issues of MLPs in an IRA are complex and possibly not fully resolved. These issues are way beyond my understanding. I have given up following the voluminous discussion on this issue by apparently knowledgable posters on the Investor Village Board. I prefer to err on the side of caution and personally would not hold a MLP in an IRA.

Respectfully
Martin

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73731 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 2:01 PM
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for low UBIT in a Roth, you might consider BIP - Brookfield Infrastructure Partners...it has a deliberate policy of low or no UBI. i have held it in my Roth for several years. the highest UBI garnered in one tax year IIRC, is maybe $40 on 300 shares. (don't have this year's k-1 yet)

while they have some pipeline, they are really considered a utility company, with toll roads, power distribution, coal shipping ports, timber railroads, etc. they have global operations.

but it might be a little expensive, right now.

www.brookfieldinfrastructure.com

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73732 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 2:03 PM
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here's this from BIP website
http://www.brookfieldinfrastructure.com/content/investor_rel...

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Author: bk57 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73733 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 3:02 PM
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Martin, I'm confused by your two consecutive posts that to me, conflict. the first says you own several MLPs in IRAs; the next says you wouldn't. Please clarify, thanks.

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Author: piranha1 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73734 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 3:33 PM
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I'm confused by your two consecutive posts that to me, conflict. the first says you own several MLPs in IRAs; the next says you wouldn't. Please clarify, thanks.

There really is no ambiguity. He, like many of us, hold MLP's in an IRA ONLY if they issue a 1099. We don't hold MLP's that issue K-1's.

Milt

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Author: bk57 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73735 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 3:37 PM
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that makes sense but i didn't get that from what he said. if that's what he meant, as RoseanneRoseannadanna used to say...."Never Mind".
thanks.

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Author: martinmoth Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73736 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/22/2013 6:23 PM
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thank you for clarifying.


Martin

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73737 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/23/2013 9:36 AM
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Someone posted an article from Barron's about MLP's on the Investor Village MLP board:

http://investorvillage.com/smbd.asp?mb=5028&mn=28927&...
Norm

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73738 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/23/2013 1:10 PM
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Valuemongeragain

You mention one way that NG producers are staying in business - i.e. hedging. I would think a lot of the smaller NG producers from shale gas must be in severe financial problems. I mean how can they hold out when they are losing something like a $1/unit or even more? I realize they have to spend a certain amount every year to keep their claims, but how are they surviving? I would think the majors would be buying them up but, if they are, it is not big enough news so that I see it. Do you have any insights?

brucedoe

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Author: Valuemongeragain One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73742 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/23/2013 4:31 PM
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brucedoe,

Probably most NG producers are surviving one of two ways, switching to drilling for oil or that they had little or no debt.

If they had little or no debt, they paid for their drilling a few years back and are taking depletion expense, a non-cash charge, as they produce the NG, so their cash flows can be better than their earnings.

As you mentioned hedging can help, but with NG prices so low for so long their hedging is helping a lot less than it used to.


VM

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Author: katinga Big funky green star, 20000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73747 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/25/2013 1:18 PM
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Barrons has an article on MLPs out this week. Its thesis is that you look for increasing distributable cash flow rather than the distribution per se. KMP, LINE, and ETP were not among the picks, IIRC, though these seem to be TMF favorites.

Oh, and LINE is technically not an MLP, since it lacks a general partner.

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Author: martinmoth Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73749 of 77713
Subject: Re: OT: EEQ/EEP Date: 2/25/2013 10:50 PM
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Probably the most-respected poster on the Investor Village MLP board - passandshoot - had this to say about the Barrons article on MLPs.

I have copied his post below
Normally I can find misinformation and incomplete information in almost any article about MLP's. If you haven't read this article, you absolutely should. Not because of their picks, but because of their informed take on the sector, the information they present on issues, and the balance they advocate. Pay special attention to the comments about yield "hogs" (yield, yield, yield).

He can be rather acerbic and is slow to praise so I would definitely read the Barrons article.

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Author: Reitnut Big red star, 1000 posts Top Favorite Fools Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73804 of 77713
Subject: Re: OT: EEQ/EEP Date: 3/3/2013 6:41 PM
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Thanks to all of you who have posted your thoughts on MLPs, and which are appropriate for IRAs. I will check them out. This is a complex investment sector, but probably worth the effort it requires. Those who like REITs should also like MLPs: Relative safety, good yields, stable cash flows, and moderate growth. And, a few tax advantages.

R.

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73991 of 77713
Subject: Re: OT: EEQ/EEP Date: 3/29/2013 8:39 PM
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Ralph,
now that i have actually received my K-1 for Brookfield Infrastructure (BIP), i can affirmatively state that the UBTI is not low at all....it is ZERO....here is what BIP says about it:

http://brookfieldinfrastructure.com/content/investor_relatio...
Unrelated Business Taxable Income (UBTI)
Brookfield Infrastructure L.P. currently has access to a revolving credit facility that it does not anticpate using. If the credit facility were utilized by Brookfield Infrastructure L.P. it may generate UBTI. Debt financed UBTI has not been and is not expected to be a material portion of Brookfield Infrastructure Partners' income. UBTI is relevant to U.S. tax exempt entities.


i have had as much as 400 shares of BIP inside my Roth acct over the last 4 years (post spinoff from BAM). the most i have garnered in UBTI, is, i think $4.00, well below the $1000 threshold triggering tax headaches.

i think the price is a little high right now, but BIP has had a fantastic run since its inception...just posted a 17% dividend increase.
i am looking for a pullback of maybe 5-10% before i enlarge my current holding.

as an MLP it offers potential diversification from your other MLPs, as it is a Utility Sector (coal ports, transmission lines, toll roads), and regional diversification (Australia, England, Canada, South America are large contributors to it's revenue)

(if you are still looking for a replacement).

best,
dana
(I currently own shares of BIP)

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