Over The Fiscal Cliff On Fundamentals
The past week ended on a recovery note after significant declines in the combination of fiscal risk, commodity declines and profit taking that marked the earlier part of the week. The gains of over 2% in the C-corps and over 4% in the MLP's on Friday, November 16, 2012 brought the performance for the week back in line with the underlying S&P and AMZ indexes that fell by 1.4% and 2.4% respectively. We view the declines as related to tax and structure concerns, oil price declines and year-end investment planning. The rationalization of these worries with compelling valuations and improving fundamentals produced the late week bounce. While the “Fiscal Cliff” discussions are likely to produce volatility along with oil prices, our view of 2013 is focused on fundamental improvements in the group from the strong base of the past few years. The valuation base of a 3.7% dividend yield for the C-corps with a 13% dividend growth rate remains unchanged for the past week (figure 1). The MLP distribution yield rose to 6.9% last week (figure 2), a spread of 530 basis points to the 10-year Treasury, placing it in territory last seen in the crisis years of 2008-2009 (figure 3). In our opinion, this is unwarranted by the fundamentals of growth, access to capital and other factors that pertain currently. We continue to favor the highest quality, fee based, organic growth companies...
Eoin Treacy's view The excess supply situation that contributed to the fall in Henry Hub natural gas prices until earlier this year has been a boon for natural gas pipelines since they benefit from increased volumes. The fact that they have performed so impressively has raised the question as to whether they are likely to be taxed more aggressively but at present this appears an outside chance. (Also see Comment of the day on August 13 th).
From the above report two of the vehicles that have the highest yields (Buckeye Petroleum LP and Energy Transfer Partners (ETP)) have also been some of the largest underperformers this year. Both have found at least short-term support in the last two weeks and currently yield in excess of 8%. Sustained moves below $44.50 and $44 respectively would be required to question currently scope for additional higher to lateral ranging.
Interestingly Energy Transfer Partners Limited Partnership (ETE) yields 5.58% and has a more constructive chart pattern. It found support in the region of the 200-day MA three weeks ago and a sustained move below it would be required to question medium-term scope for continued upside. However this comparative total return chart suggests that the iteration with the higher yield has outperformed consistently over the last couple of years. Here is a similar chart for two of Kinder Morgan's iterations: KMI (4%) and KMP (5.98%). While the KMI iteration has only been in existence for the last 18 months, the higher yielding version has also outperformed in this instance. This would suggest that despite some short-term volatility, the higher yielding versions tend to offer the better returns over the medium-term.
Elsewhere the in MLP sector Plains All American Pipeline (4.6%), ONEOK Partners (4.41%) and Magellan Midstream (4.08%) all found support in the region of the 200-day MA over the last few weeks and sustained moves below their recent lows would be required to question medium-term scope for continued upside.