 | MARKET CONDITIONS Keep an eye on interest rates! Earlier this month, ONEOK Inc. (NYSE: OKE) decided to wind down its energy-services business. Don't worry about it. This news does not affect our MLP position in ONEOK Partners (NYSE: OKS). |
OKE does have a 43.4% stake in OKS' business but OKS is separate from OKE's energy-services business. So what OKE does with that business doesn't affect OKS. OKS is still going strong and is on track to deliver 8%-12% dividend growth in the coming years.
OKS gave a presentation at the Global Hunter Securities GHS 100 Energy Conference in Chicago, Illinois yesterday. The presentation has 74 slides. I'll only give you some highlights in this update. But you can view the full presentation here.
OKS is projecting 89% of its natural gas pipeline capacity will be under contract for 2013. It expects 100% of its natural gas storage capacity to be under firm, fee-based contracts for 2013. These are the same projections the company made in February, so it's clearly on track for the year.
OKS expects to get about 68% of its gross margin from purely fee-based contracts in 2013. That means 68% of its gross margin isn't exposed to commodity price swings. Much of the remaining exposure is hedged. That's great news. It's important to us that an MLP isn't overly exposed to commodity price fluctuations. We want all our MLPs to provide steady, primarily fee-based income.
OKS has a $2 billion-$3 billion backlog of unannounced growth projects in natural gas, natural gas liquids (NGL) – like propane, butane, and ethane – and crude-oil processing, pipelines, and storage. Whether OKS proceeds with an unannounced project depends on commitments by energy producers, processors, and end-users. We don't expect that to be a problem. With the enormous energy boom in the U.S., we expect producers and processors to clamor for more pipelines and storage and end users to welcome the security and lower prices that result from the increased supply.
OKS says it's still on track to deliver 8%-12% annual dividend growth from 2012 through 2015. Right now, OKS pays out a 5.9% dividend yield. If OKS continues to raise its distribution payouts at the high end of its projected range, you could be earning a double-digit yield over today's cost within five years. OKS expects to pay distributions totaling $2.87 per unit in 2013. That's a yield over the current share price of about 6%. It's also about 10.8% higher than 2012's annual payout of $2.59 per unit. So OKS does expect to deliver double-digit distribution growth this year – one of the primary reasons you'd want to own the MLP.
As you can see, OKE's announcement earlier this month has no effect on our OKS position. Our advice remains the same.
BUY ONEOK Partners, L.P. (NYSE: OKS) up to $57 a share. Right now, OKS trades around $48 per share.
Our MLP picks have performed well for us so far – up an average of 36% but if interest rates keep rising, we may have some words of caution for you.
We don't like MLPs trading at current yields of less than 4% above the 10-year U.S. Treasury yield. The 10-year Treasury yield is a key benchmark interest rate. When it goes up, interest rates for any bonds, loans, and other income investments – including MLPs – also tend to go up... which means their prices go down.
Recently, the 10-year Treasury yield has surged from below 2% to around 2.6%. That makes MLPs less attractive. Interest rates could continue to surge. If they do, we may stop out of our MLPs. I'll continue to keep an eye on interest rates and I encourage you to do the same. If they keep rising and MLP prices fall, I'll likely recommend tightening your trailing stops.
Interest rates are a big deal to MLPs. For most of the MLPs we recommend, roughly half their capital is debt. Higher interest rates mean a higher cost of capital. A higher cost of capital means some growth projects might not be worth doing. Without good growth prospects, many MLPs could become less attractive.
That doesn't mean we would ignore all MLPs... Less growth could mean higher demand relative to the supply of pipelines, processing, and storage. So companies that already own plenty of those facilities could have more pricing power should growth slow; and we like MLPs with a large and growing presence in their markets.
Also, lower MLP prices could give us the opportunity to recommend some of the MLPs that pass our model but have been too expensive in the past. Falling stock prices are generally viewed as bad by most investors. But I've learned to take the opposite view and look for the opportunities falling prices can create.
MLP Positions Recent Price Stop Loss
Vanguard Natural Resources (VNR) $28.04 $22.19
Williams Partners (WPZ) $49.06 $40.35
DCP Midstream Partners (DPM) $51.36 $40.52
Enterprise Partners (EPD) $58.84 $47.32
Energy Transfer Partners (ETP) $48.47 $39.20
ONEOK Partners, L.P. (OKS) $47.81 $44.85
Kinder Morgan Mgmt. (KMR) $80.56 $60.42
OKS gave a presentation at the Global Hunter Securities GHS 100 Energy Conference in Chicago, Illinois yesterday. The presentation has 74 slides. I'll only give you some highlights in this update. But you can view the full presentation here.
OKS is projecting 89% of its natural gas pipeline capacity will be under contract for 2013. It expects 100% of its natural gas storage capacity to be under firm, fee-based contracts for 2013. These are the same projections the company made in February, so it's clearly on track for the year.
OKS expects to get about 68% of its gross margin from purely fee-based contracts in 2013. That means 68% of its gross margin isn't exposed to commodity price swings. Much of the remaining exposure is hedged. That's great news. It's important to us that an MLP isn't overly exposed to commodity price fluctuations. We want all our MLPs to provide steady, primarily fee-based income.
OKS has a $2 billion-$3 billion backlog of unannounced growth projects in natural gas, natural gas liquids (NGL) – like propane, butane, and ethane – and crude-oil processing, pipelines, and storage. Whether OKS proceeds with an unannounced project depends on commitments by energy producers, processors, and end-users. We don't expect that to be a problem. With the enormous energy boom in the U.S., we expect producers and processors to clamor for more pipelines and storage and end users to welcome the security and lower prices that result from the increased supply.
OKS says it's still on track to deliver 8%-12% annual dividend growth from 2012 through 2015. Right now, OKS pays out a 5.9% dividend yield. If OKS continues to raise its distribution payouts at the high end of its projected range, you could be earning a double-digit yield over today's cost within five years. OKS expects to pay distributions totaling $2.87 per unit in 2013. That's a yield over the current share price of about 6%. It's also about 10.8% higher than 2012's annual payout of $2.59 per unit. So OKS does expect to deliver double-digit distribution growth this year – one of the primary reasons you'd want to own the MLP.
As you can see, OKE's announcement earlier this month has no effect on our OKS position. Our advice remains the same.
BUY ONEOK Partners, L.P. (NYSE: OKS) up to $57 a share. Right now, OKS trades around $48 per share.
Our MLP picks have performed well for us so far – up an average of 36% but if interest rates keep rising, we may have some words of caution for you.
We don't like MLPs trading at current yields of less than 4% above the 10-year U.S. Treasury yield. The 10-year Treasury yield is a key benchmark interest rate. When it goes up, interest rates for any bonds, loans, and other income investments – including MLPs – also tend to go up... which means their prices go down.
Recently, the 10-year Treasury yield has surged from below 2% to around 2.6%. That makes MLPs less attractive. Interest rates could continue to surge. If they do, we may stop out of our MLPs. I'll continue to keep an eye on interest rates and I encourage you to do the same. If they keep rising and MLP prices fall, I'll likely recommend tightening your trailing stops.
Interest rates are a big deal to MLPs. For most of the MLPs we recommend, roughly half their capital is debt. Higher interest rates mean a higher cost of capital. A higher cost of capital means some growth projects might not be worth doing. Without good growth prospects, many MLPs could become less attractive.
That doesn't mean we would ignore all MLPs... Less growth could mean higher demand relative to the supply of pipelines, processing, and storage. So companies that already own plenty of those facilities could have more pricing power should growth slow; and we like MLPs with a large and growing presence in their markets.
Also, lower MLP prices could give us the opportunity to recommend some of the MLPs that pass our model but have been too expensive in the past. Falling stock prices are generally viewed as bad by most investors. But I've learned to take the opposite view and look for the opportunities falling prices can create.
MLP Positions Recent Price Stop Loss
Vanguard Natural Resources (VNR) $28.04 $22.19
Williams Partners (WPZ) $49.06 $40.35
DCP Midstream Partners (DPM) $51.36 $40.52
Enterprise Partners (EPD) $58.84 $47.32
Energy Transfer Partners (ETP) $48.47 $39.20
ONEOK Partners, L.P. (OKS) $47.81 $44.85
Kinder Morgan Mgmt. (KMR) $80.56 $60.42
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