From Harley Bassman, the Convexity Maven, October 22:
“Ever tried; Ever failed, No matter;
Try again; Fail again; Fail better”
Those who did not major in the humanities likely only know Samuel Beckett from his play “Waiting for Godot”, which premiered in Paris in 1953. I saw the more recent and well-acclaimed version on Broadway in 2013 with Patrick Stewart and Ian McKellen. That said, I find the notion of “fail better” to be more poignant as it so well aligns with the Bassman family motto –Never panic, never give up. Today, I seek to merge the play and the poem with respect to oil/gas MLP’s....MUCH MORE (8 page PDF)
I stopped collecting a W-2 in 2017, and as consistent with my demographic cohort, I began looking for investments that might produce a reasonable income despite the efforts of the G-7 Central Banks to pressure interest rates to zero.
At the suggestion of a trusted colleague, I started sniffing at mid-stream oil and gas Master Limited Partnerships (MLPs). I had avoided these in the past as it was unclear that the toil and treasure involved in filing a fistful of K-1 tax forms was worth the meager extra few hundred basis points of yield.
Skipping over the how and why, I will just say that any significant asset class that tumbles nearly 60% in a year without someone going to jail deserves a second look.
At 30,000 feet, I fundamentally like the mid-stream business since they earn their income from transporting carbon-based energy (oil and gas) from point A to point B.In theory they are insulated from the exploration and marketing business, and are thus are less impacted by price. This is well within my wheelhouse since it dovetails nicely with the old notion that Wall Street is in the “moving business, not the storage business”. [Program Note: Merrill went bust when our CEO decided to store (own) $45bn of CDOs instead of selling them.]
While not quite a Ponzi scheme, MLPs collapsed in late 2014 as their financial structure was often governed by the mis-aligned interests between the General Partner (GP) and the Limited Partner(LP). Soon enough, Adam Smith’s Invisible Hand pressured structural change in this sector that has now mostly aligned the interests of management and shareholders, as well as reduced the financial (cash flow) uncertainty between capital expenses and dividend payouts.
Using the Alerian MLP Index (AMZ) and its eponymous ETF (AMLP) for reference and eventual trade execution, it seemed that a December 2017 value of down 50% from the late 2014 high would be a fine entry point. All I have to say is that those who liked MLPs down 50%,must love them down a further 20%
While there are many ways to value this asset class, I suppose the most salient might be the size and security of the dividend since this sector is primarily an income vehicle. AMLP peaked in 2014 at $19.35 to yield about 6.00% or 360bps cheap to the UST10yr rate; and about flat to the High Yield (HY) Index
AMLP’s quarterly payout topped at $0.299 in early 2015; and was clipped 31% to $0.2052 by late 2017. It closed that year at $10.79 to yield 7.61%, 520bp cheap to the UST10yr. The most recent dividend of $0.19 was announced in August.Versus a current price of $8.74, this ETF yields 8.70% for a pick-up of nearly 700bps to the UST10yr and 350bp to HY. Either $8.74 is the wrong price, or this dividend will soon be cut to $0.13. In preview, I think it’s the former.
At core, the problem with MLPs was their structure and cash management.A significant portion of earnings were paid to the General Partner in the form of Incentive Distribution Rights (IDRs). Additionally, capital expenditures were often funded via secondary Equity offerings or increased Debt. It was the swift collapse of oil prices in late 2014 that finally brought focus to these issues.
I will defer to the experts to explain the embedded conflicts for the Limited Partners, but once the music stopped and payout reductions closed the window for new capital, the market forced management to alter business practices. The period prior to 2015 is often known as the MLP 1.0 model, and post 2018 is now called the MLP 2.0 model.
Presently, only a weighted 14% of AMLP still have IDRs in place. Earnings now cover distributions by a weighted 140%; an excess that allows capital expenditures to often be funded internally. These changes have not been painless, thus the reduction in dividends; but on the flip side, payouts should be more secure and efficiency should lead to dividend growth. In fact, Bloomberg estimates (BDVD) a November dividend for AMLP at $0.21.
Of course, after five years of almost consecutively lower dividends, the market is no longer accepting management’s good word.The -majorelleline- below is the relative P/E of the AMZ Index versus the SPX. While it is not clear that the tech-heavy S&P should map directly to what is basically a utility, at some point earnings per share do matter.And I would note an updated chart would sport an even larger discount since AMZ has dipped another 5% since August....
Our adventures in MLP's were slightly different from Mr. Bassman's. Cue misty water-colored memories.
November 2018
That Time FT Alphaville's Izabella Kaminska Spotted A Potential Disaster In Natural Gas and Saved Western Civilization
On the "saved western civilization" bit I may be confusing Ms Kaminska with another Polish name, Sobieski.
And on further reflection it may not have been Western Civ that was saved but rather some fund manager's and analyst's butts and bonuses.
Here's the story.
August 18, 2014 started like any other day, with the question of how to present oneself to the world: knee breeches or sans-culottes?
Deciding, for the umteenth time the world may not be quite ready for the revival of the eighteenth century aesthetic:
it's pantaloons and out the door, little knowing our fortunes were about to turn very jolly.
Going back a few days:
Aug. 11
In Other News: "Kinder Morgan to abandon MLP structure it pioneered, will become 4th biggest US energy company" (KMI)
...And more to come.
KMP, KMR and EPB
The next day, August 12:
In that morning's FT Alphaville Further Reading post the Financial Times' David Keohane commends to our attention a quick hit from Matt Levine which we linked in "Kinder Morgan Creates Money Out of Thin Air"
Later that same day Izabella Kaminska weighs in with a post we intro'd with:
Asking the Right Question About the Kinder Morgan Deal: Why Now? (KMI)
In commercial real estate you depreciate until you can't depreciate any more and then if possible do a 1031 exchange to get out of the property without paying cap gains. In estate planning you defer untaxed capital appreciation as long as possible to afford your heirs the opportunity to discover the wonder of a step up in basis. This is one of the driving issues in the sale of the Los Angeles Clippers, what are the tax implications?Izabella was considerably less pretentious, apparently channeling the upbeat spirit of Cole Porter's "Let's Do It":
It's all about the intertemporal and intrafamilial tax trades.
On the art of creating value from nothing
Bitcoin does it. Dogecoin does it. Gold miners do it. And now Kinder Morgan does it too.Which brings us to that wonderful late summer day:
What we’re talking about is the amazing ability to create value out of nothing....
August 18, 2014
The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)
Companies that engage in great amounts of financial engineering are always worth looking at as potential shorts. A lot of skullduggery can occur when the razzamatazz really gets going.And it was off to the races.
This week both Barron's which has been skeptical for a while, and FT Alphaville which has, until today, been neutral take a look at all the moving parts.
Regarding a short on KMI, I hate paying dividends on short positions.
Hate it, hate it, hate it.
But I might be tempted in this case. And the rate of ascent on the stock is definitely rolling over.
First up, FT Alphaville:
Kinder Morgan, MLPs and the sell case...
Here's the monthly chart via FinViz:
The roll up was done in August 2014 at around $41, currently trading at $16.05.
There's much more to the story but the reason this all came to mind was the approaching anniversary of a pair of posts from
December 3, 2015:
Kinder Morgan Sets Multi-Year Low As Reality of Approaching Junk Status Sinks In (KMI) UPDATED
And:
"Kinder Morgan: In Which Izabella Kaminska Declines To Take A Victory Lap And Instead Highlights Recent Analysis (KMI)"
Good one Izzy.
