We overlaid some of the recent Fitch Ratings analysis after the individual MLPs.  The aim is to show how the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB).

As the end of 2012 approaches rapidly, we wanted to take a year-end look into the sector to see where there is opportunity versus risk.  We have shown the basic fundamentals of some of our top go-to names in the MLP sector and have shown a chart of the key ETF in this sector.  A report from Fitch Ratings earlier this month called MLPs fairly well positioned against economic regulatory risks and has noted that the sector should generate stable operating performance and financial credit measures for 2012.  The belief was that these should remain consistent with recent past performance and the outlook includes natural gas pipelines as well as crude oil and refined products pipelines. 

Income and dividend investors have become more aggressively interested in MLPs after a couple of years of Treasury rates and CD rates not paying anything of substance any more for income.  Retirees need cash flow from their investments in order to live.  Even though these distributions paid to investors act as dividends, there is usually a mixed combination of income and a return of capital.  In short, not all of the distributions paid out are treated the same by the tax-man.

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $39.2 billion now and trades at $45.00, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.5%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.9 billion and trades at $81.00, above its consensus target of $76.11 and against a prior 52-week range of $63.42 to $80.52.  The implied distribution per year based on the last payout was 5.8%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.6 billion.  This unit trades at $54.20, and is under the consensus target of $61.88 and it has a 52-week range of $39.00 to $56.82.  The implied distribution per year based on the last payout was 5.4%.

We have overlaid some of the Fitch Ratings analysis after the individual MLPs because we wanted to show you what the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB). 

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $40 billion now and trades at $46.10, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.3%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.1 billion and trades at $78.50, above its consensus target of $76.11 and against a 52-week range of $63.42 to $79.34.  The implied distribution per year based on the last payout was 5.9%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.7 billion.  This unit trades at $55.80, and is under the consensus target of $58.38 and it has a 52-week range of $39.00 to $56.40.  The implied distribution per year based on the last payout was 5.3%.

Plains All American Pipeline, L.P. (NYSE: PAA) is valued at $10 billion, and its $67.30 price compares against a price target of $71.96 and its 52-week trading range is $54.90 to $67.74.  The implied distribution per year based on the last payout was 5.9%.

Williams Partners L.P. (NYSE: WPZ) is worth some $17.3 billion and its $59.65 price compares to a target of $60.81 and a 52-week range of $44.81 to $61.22.  The implied distribution per year based on the last payout was about 5%.

Magellan Midstream Partners, L.P. (NYSE: MMP) is worth $7.35 billion and its $6.30 price is just under the $66.64 consensus price target.  Its 52-week range is $51.00 to $65.92. The implied distribution per year based on the last payout was only about 4.9%.

Buckeye Partners, L.P. (NYSE: BPL) is valued at $5.95 billion and its $63.98 price is pretty far under the consensus price target of $70.25.  It has a 52-week range of $54.51 to $68.92. The implied distribution per year based on the last payout was 6.5%.

El Paso Pipeline Partners, L.P. (NYSE: EPB) is valued at $6.7 billion with a $32.60 share price.  That is one of the largest discounts to the consensus price targets of peers as its target is $39.00.  Its 52-week range is $31.34 to $38.36. The implied distribution per year based on the last payout was 6.1% based on today’s price.

Because many of the largest MLPs are so close to or above the consensus price targets, we recently gave the 24/7 Wall St. Model Dividend Portfolio some changes to focus more on the funds and ETFs (with payout rates based upon the average of the last two payouts): Kayne Anderson MLP Investment Company (NYSE: KYN) with a distribution of about 6.9%; JPMorgan Alerian MLP Index ETN (NYSE: AMJ) with a distribution of about 5.2%; and ALPS Alerian MLP ETF (NYSE: AMLP) with a distribution of about 6.3%.

It also highlights outfits like Williams Companies, Inc. (NYSE: WMB) and other hard asset outfits which many may consider to be under the universe of partnerships or MLPs.  Some of the entities which investors may focus on in MLPs ar Plains All American Pipeline, L.P. (NYSE: PAA), Magellan Midstream Partners LP (NYSE: MMP), and Buckeye Partners LP (NYSE: BPL).

Plains All American Pipeline, L.P. (NYSE: PAA) is worth some $9.2 billion now and at $61.75 it has a 52-week range of $54.90 to $65.96.  Plains All American is in many aspects of transporting and storage, but one stat at the end of 2010 was that it had some 16,000 miles of active crude oil and refined products pipelines, as well as a fleet of trucks, trailers, and tugs various aspects of oil and natural gas.

Magellan Midstream Partners LP (NYSE: MMP) is worth some $7 billion and at $62.37 its 52-week range is $51.00 to $63.14.  Magellan has more than this, but as of the first quarter it operated roughly 9,600 miles of petroleum products pipeline system, 51 terminals, 6 marine petroleum terminals, 1 crude oil storage, 27 petroleum products inland terminals, and a 1,100-mile ammonia pipeline system and 6 associated terminals.

Buckeye Partners LP (NYSE: BPL) is now worth almost $6.1 billion and at $65.45 its 52-week range is $54.51 to $71.67.  Buckeye owns and operates approximately 5,400 miles of pipeline systems and has more than 60 liquid petroleum products terminals on last look. Another segment operates approximately 2,700 miles of third-party pipeline and terminals.

The merger also highlights the ETF (actually an ETN) of JPMorgan Alerian MLP Index ETN (NYSE: AMJ) and the closed-end fund of Kayne Anderson MLP Investment Company (NYSE: KYN).

So, as far as this concerns Williams Companies, Inc. (NYSE: WMB), the company is worth $16.5 billion.  At $28.05, its 52-week range is $20.20 to $33.47.  Williams has an exploration and production outfit like El Paso and it also has midstream assets and gas pipelines, although the company’s site notes that its MLP of by Williams Partners L.P. (NYSE: WPZ) owns and operates most of the company’s interstate gas pipeline assets.  Williams owns approximately 75 percent of Williams Partners, including the controlling general partner interest.  Its  pipelines deliver approximately 14% of the natural gas consumed in the United States.

Williams Companies has earnings estimates of $1.51 EPS for 2011 and $1.78 EPS for 2012, so its $28.05 share price generates a blended forward earnings multiple of about 17-times earnings.  The company has a 2.9% dividend yield and it trades at more than 2-times book value.  As far as how that compares to El Paso Corporation, El Paso’s blended estimates at the current price generates a forward multiple of close to 21-times earnings and more than 4-times its stated book value.

Not all pipeline assets will be acquired.  The value is just too high on a nominal basis for every deal that makes sense on the surface to make sense in raw dollars.  Some players also have provisions which might make a change of control less attractive for a buyer and these are just some of the other companies to consider in the sector.

JON C. OGG

Blockbuster (BBI) Concerns about postal costs. Down to $2.99 from 52-week high of $7.30.

Williams Partners (WPZ) Brings new stock offering to market. Falls to $36.95 from 52-week high of $50.

UTI Worldwide (UTIW) Loses deal with Wal-Mart (WMT). Trades down to $18.40 from 52-week high of $32.

Zumiez (ZUMZ) Poor same-store sales. Falls to $24.95 from 52-week high of $53.99.

Savvis (SVVS) Drops outlook for next quarter. Drops to $27.68 from 52-week high of $53.47

Douglas A. McIntyre

WMB also announced a $1B stock buyback, which brings its total buybacks to just over $10B from a board-authorized total of $20B. WMB also announced an agreement with Bear Stearns (NYSE:BSC) in May to sell essentially all of its electric power generation assets to BSC for about $512MM.

The primary asset in the new MLP will be WMB’s Northwest pipeline, a 3,900-mile bi-directional system that supplies the Pacific Northwest with natural gas from the San Juan Basin, Canada, and the northern Rockies. WMB is not including its Transco system, which hauls gas from the Gulf Coast to the U.S. northeast, nor is the Gulfstream pipeline, from Mississippi to central Florida. WMB’s Transco pipeline is the jewel in its midstream assets. It serves a huge market along the Atlantic seaboard and is close enough to the coast that if LNG terminals are ever built, Transco is a natural connection point to move that gas to northeast markets.

In the past 5 years, WMB stock has risen from a low of $1.40 in October 2002, to yesterday’s close at $34.39. Today’s news bumped the share price by $1.56 almost instantly, and that is good news for WMB shareholders. But the company’s P/E ratio for the trailing twelve months is 66.36. That would be dot.com territory for a company with a mean target price of $35.90. The saving grace: a $21 Billion market cap and a 2007-forward P/E of 26 if it hits targets.

Paul Ausick
July 20, 2007