Oil And Gas MLPs Seen As Boon To Investors By Leading Industry Analyst
December 8, 2009 - The Wall Street Transcript has just published Oil & Gas Production and Distribution Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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ETHAN BELLAMY, Senior Vice President of Natural Resources within the equity research department of Wunderlich Securities, specializes in the analysis of master limited partnerships. Previously he was the Director of Research for the Lehman Brothers MLP Opportunity Fund in Houston, Texas, where he was responsible for fundamental analysis and due diligence in public, PIPE and pre-IPO investments in natural resources.
Prior to joining Lehman Brothers, Mr. Bellamy was a Senior Analyst covering MLPs at Stifel Nicolaus, where his coverage included oil and natural gas production, gathering and transportation, propane distribution, marine shipping, coal mining and MLP-oriented closed-end funds. Mr. Bellamy previously worked as a journalist for various local and national media, and taught writing and journalism at the University of Colorado at Boulder for two years. More recently he was a doctoral student focusing on energy policy at the University of Colorado at Denver, with a focus on energy infrastructure and renewable energy policy. He holds an M.A. from the University of Colorado at Boulder and a B.A. from Clemson University.
TWST: Where should investors be looking at this point?
Mr. Bellamy: Well, it really depends on risk tolerance. So I'll give you a few answers. For investors who have higher risk tolerance, what I expect to see is the smaller-capitalization, higher-yielding, lower-liquidity MLPs with greater commodity price sensitivity outperform in 2010 as yields continue to compress, as the credit and equity markets continue to normalize and as the macroeconomic climate improves. That is for more aggressive investors with risk tolerance. For investors seeking very stable distributions with no commodity price sensitivity, you are better off sticking with larger-cap, investment-grade MLPs. Those would include the traditional favorites, such as Enterprise Products (EPD), Kinder Morgan (KMP) and some smaller newcomers with large corporate C-Corp parents, such as El Paso Pipeline Partners (EPB) and Spectra Energy Partners (SEP).
In my coverage, my favorite natural gas-oriented play is Inergy LP, ticker NRGY, and I think the best-performing MLP of the next three years is likely to be Inergy Holdings LP, ticker NRGP, which is the general partner and owns incentive distribution rights in NRGY. Forty percent of their business is midstream and 60% is propane. You have significant expansion projects in natural gas storage in the Marcellus Shale. Their assets are in New York and they are at the terminal of many of the pipelines that take natural gas from the Gulf Coast to the Northeast and consuming regions. I think NRGY is poised to grow substantially over the coming years. If I'm right, then the higher beta way to capitalize on that is through NRGP.
TWST: As you say, investors have been interested in the space. What is the risk at this point, is it purely pricing?
Mr. Bellamy: The risk I would describe is more technical than fundamental. One of the positive arguments that's been made about MLPs over the past five years has been their low correlation to the broader markets. However, if you look back really since the beginning of 2008 to present, MLPs have traded with a heightened correlation to the broader markets. I think that the risk that distributions are cut is fairly low. I think we've already seen those shakeouts occur. So you could see the space continue to trade in line with the broader markets. The good thing is if you buy an MLP, you like the distribution and you think it's stable, if the yield rises, you are still going to get that steady check, which we like and we think limits some of the downside. In most of the scenarios that we see for the broader market, whether there is a large pullback or whether the market moves up incrementally and we move back to 2% to 3% long-term GDP, I'd still rather own MLPs than almost any other asset class just given the defensive attributes on the fundamental side.
We're not in the cheerleading business, but it is really hard to argue with the MLP value proposition given the defensive characteristics of the sector, growth in natural gas consumption and the distribution track record. We just saw third quarter-weighted average sector growth of about 4%, basically in line with the second quarter. What other group is paying this kind of cash to its investors on a consistent basis?
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