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Page 1: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Inside the MLP Factory

Igor GreenwaldThe Wealth Summit

May 2014

Page 2: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Do You Like Sausage?

Page 3: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

I know I do; let me count the ways:

• Grilled, with onions

• Smoked with sauerkraut

• On a stick, fried in pancake batter (Not really, but someone out there does.)

Page 4: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

What does sausage have to do with master limited partnerships?

Only this:

The end result is much more appealing than the preparation process

Page 5: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Why the bad rap for sausage factories?

“If you like laws and sausages,

You should never watch

either one being made.”

─ Otto von Bismarck, maybe

Another thing The Iron Chancellor

probably didn’t say:

“If you like pithy quotes, don’t

worry too much about attribution.”

Blame this man:

Page 6: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

How are MLPs like laws and sausages?

Complex process

Assembled by specialists

Defects hard to spot

Fill a need for the public

Producers can profit by fooling consumers

Page 7: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

The insinuation: If only you knew

“The $500 billion master-limited-partnership

sector is the sausage maker of the investment

world. Buyers love the yields ─ now averaging

about 6% ─ but many know little about how the

yields are generated. And Kinder Morgan, the

country's largest energy-infrastructure company,

may be the biggest sausage maker of them all.”

“Kinder Morgan: Trouble in the Pipelines?”

Barron’s, Feb. 22, 2014  

Page 8: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

And yet, here’s what we know:

• Sausage is tasty

• Laws keep anarchy at bay

• MLPs have been the best

investment so far in this century

Page 9: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Deal of the Century

Page 10: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Source: Pension Consulting Alliance

Page 11: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Source: Pension Consulting Alliance

Page 12: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Source: Pension Consulting Alliance

Page 13: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Source: Pension Consulting Alliance

Page 14: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

How Fresh Is That Sausage?

• Past performance does not predict future

• Outperformance won’t last forever

• Risk of reversion rises over time

• The role of sentiment in market cycles

Page 15: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Reality Check

Source: William Blair

Page 16: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

The People’s Choice

Predictable tax-deferred income

Exempt from corporate income tax

Long-term contracts, regulated tariffs

Yield above bonds, REITs, utilities

Growth industry amid US shale boom

Great long-term track record

Page 17: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

No Contest

Source: Alerian

Page 18: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Drill, Baby, Drill

Source: US Energy Information Administration

Projected US energy production

Page 19: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Moveable Feast

Source: RBN Energy

Government shale forecasts keep missing low

Page 20: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Good Times, Not So Bad Times

Five Best Years

2009: 76%

2000: 46%

2003: 45%

2001: 44%

2010: 36%

Selected Alerian MLP Index annual returns since 1996

Five Worst Years

2008: -37%

1999: -8%

2002: -3%

1998: -3%

2012: 5% Sources: Alerian, Hinds Howard

Page 21: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

The Price of Success

Page 22: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.
Page 23: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.
Page 24: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

MLP Bulls Come LatelyNew investment vehicles by year of launch

Page 25: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Drilling for Cheap Capital

Source: Hinds Howard

Page 26: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

C-Corps ♥ Selling MLPs

Recent Spinoffs: Phillips 66 Partners (PSXP) from Phillips 66 (PSX) – top ‘13 MLP IPO Valero Energy Partners (VLP) from Valero Energy (VLO) Western Refining Logistics (WNRL) from Western Refining (WNR) EnLink Midstream Partners (ENLK) from Devon (DVN) and Crosstex (XTXI) Enable Midstream (ENBL) from CenterPoint (CNP) and OGE Energy (OGE)

More In Store: Dominion Midstream LNG MLP from Dominion (D) Antero Resources Midstream MLP from Antero Resources (AR) LNG tanker MLP from GasLog (GLOG) Offshore drilling rig MLP from Transocean (RIG) LNG processing MLP from Energy Transfer Equity (ETE)

Page 27: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Devon’s Sweet Deal

Page 28: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

• Devon valued (still!) at less than 5x EV/EBITDA

• Deal valued auxiliary midstream assets at 11x EBITDA

• Devon’s contribution to MLP valued at $4.8 billion

• Market has since repriced to more than $7 billion, or 16x

EBITDA

• MLP trading at three times Devon’s cash flow multiple

MLP Alchemy

Page 29: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

PSX vs. PSXP

PSX

EV = $49.3B

EBITDA = $3.4B

EV/EBITDA = 14.5

The high cost of the extra “P”

PSXP

EV = $3.5B

EBITDA = $67.7M

EV/EBITDA = 51.7

• PSX owns 72% of PSXP LP units plus 2% GP interest

• Investors paying more than triple for PSXP over PSX

• Fast distribution growth is nice, but at 1.6% yield, not fast enough

• PSXP up 93% in 9 months since IPO, 48% year-to-date

• Troubling faith in perpetual growth

Page 30: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

A Different Yardstick

Page 31: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Bonds Have More Fun

• Fixed income in fourth decade of bull market

• Government bonds don’t have business risk

• On plus side, bond coupons don’t grow like MLP payouts

• If rates rise, MLP yields could follow via capital losses

Why comparisons with credit yields may prove misleading

Page 32: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

What’s Wrong

With This Picture? Anchoring bias assumes starting

price is the right one

No guarantee distribution growth builds partnership value

No guarantee yield is justified by business prospects

Many MLPs are beyond reproach and have very bright prospects, but the exceptions to this rule can be very costly

Page 33: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

The MLP Profits Philosophy

We recommend investments, not tax shelters

We do so based on long-term fundamentals, not yield

We’re bullish on many strong MLPs and GPs

But we’re also not afraid to sell and criticize

Or to admit mistakes and change course

Page 34: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Strong Performance Record• Last year’s picks returned nearly 40% annualized by year-end

• Portfolio comfortably beat MLP benchmark as well as S&P 500

Timely buys:

Energy Transfer Equity (ETE) +66% since 6/7/13

EQT Midstream Partners (EQM) +64% since 8/12/13

Sunoco Logistics Partners (SXL) +42% since 8/12/13

Targa Resources (TRGP) +35% since 11/15/13

Timely sells:

Eagle Rock Partners (EROC) -49% since 5/29/13

Boardwalk Pipeline Partners (BWP) -42% since 11/15/13

Timely re-buys:

Boardwalk Pipeline Partners (BWP) +15% since 4/4/14

Page 35: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Key MLP Profits Growth Themes

• LPG Exports (EPD, TRGP, NGLS)

• LNG Exports (ETE, WMB, KMI, TGP)

• Oil, Fuels Surge (MMP, SXL, BPL, OILT)

• Northeast Energy (EQM, WMB, MWE)

• GPs With IDRs (ETE, KMI, WMB, AHGP)

• Propane Logistics (APU, NGL)

Page 36: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

A Margin Of Safety

Top 3 Best Buys (EPD, MMP, SXL) averaged excess coverage of more than 50% of distributions at end of 2013

Excess coverage can fund capital projects in place of equity/debt issuance, aiding returns

Top 3 up 16% YTD, 38% in year before yield

Page 37: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Let’s Talk IncentivesIncentive Distribution Rights (IDRs) pay general partner (GP) growing percentage of MLP cash flow

Typical: 15% of payout above X, 25% above Y, 50% above Z, per unit

Stated rationale: incents GP to grow MLP

Unmentioned: dilutes rewards of growth for limited partners

Perverse: Top hedge funders charge 2/20 fees; many GPs 2/50

Means GP can profit even from losing investment; fund with debt then collect almost 50% of notional cash flow boost. A sweet deal.

Or fund with equity and collect extra IDRs on new units long before any return. Also why some GPs turn their MLPs into serial acquirers

IDRs can have huge effect on returns and are main reason we tend to favor GPs over affiliated MLPs

Page 38: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Follow the Bouncing IDRs

Page 39: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

In Summary

MLPs in sweet spot of domestic energy boom

Lofty valuations suggest increased risk

Downside from higher rates, lower energy prices

Returns can be tasty, but insiders eat first

We watch sausage get made so you can enjoy

Page 40: Inside the MLP Factory Igor Greenwald The Wealth Summit May 2014.

Thank You.


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