Where the bargains are   Recently updated


After close of a decade of uninterrupted bull market, it’s hard to find many stocks that truly qualify as cheap today.

But not everything is pricey – you can still find values if you know where to look.

And oil and gas master limited partnerships (MLPs), as a sector, are a screaming buy at today’s prices, in my opinion.

 

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Low Rates

In my view, a combination of low interest rates, a shrinking pool of available shares due to buybacks and mergers, and a general lack of investable alternatives have all conspired to create one of the most expensive markets history.

To put numbers to it, the Standard & Poor’s 500-stock index’s cyclically adjusted price-to-earnings ratio (“CAPE”), which compares a 10-year average of corporate earnings to today’s share prices, clocks in at 31.

That’s late 1997 levels. Meanwhile, the S&P 500’s price-to-sales ratio recently hit 2.0, putting it on par with its levels in 2000, at the peak of the greatest bubble in market history.

 

Greater Value

However, pipeline MLPs are looking inexpensive at the same time they’re exhibiting greater quality, in my opinion.

After a couple difficult years in 2014 and 2015, MLPs have gotten their leverage under control and started funding their growth projects with internally generated cash flow rather than new debt.

“After several years of deleveraging and structural simplifications – which unfortunately came with distribution reductions in several cases – MLPs as an asset class are in the best financial health we’ve seen in a long time with an increased focus on per unit returns and self-funding capital expenditures,” explains John Musgrave, Co-Chief Investment Officer of Cushing Asset Management.

”And based on current price-to-DCF and EV-to-EBITDA multiples, MLPs are exceptionally cheap by the standards of the past 10 years.”

 

EPD Shines

For a blue-chip MLP play, consider Enterprise Products Partners LP (EPD).

Enterprise Products, in my view, is one of the oldest and best-respected MLPs you’re ever going to find.

In an industry that has traditionally been run by cowboy capitalists, Enterprise has managed to stay remarkably level headed over the years and as reliable as Old Faithful, according to my analysis.

Chase Robertson, Chairman of Houston, Texas-based RIA Robertson Wealth Management, says, “Enterprise Products Partners has been a core holding of our income portfolios for over a decade. It’s been a dependable workhorse for us, consistently raising its distribution like clockwork.”

 

Energy Play

Since going public in 1998, Enterprise has grown into one of the largest energy infrastructure companies in the world with approximately 50,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines and 260 million barrels of storage capacity.

Furthermore, Enterprise has eliminated the single biggest conflict of interest that has long plagued the MLP space: incentive distribution rights (IDRs).

 

Takeaway

In a traditional IDR arrangement, the MLP’s general partner takes a disproportionate share of any distribution hikes to shareholders, which incentivizes them to bet the farm by raising distributions at an unsustainable pace. EPD and MMP eliminated IDRs years ago, which partly explains their more conservative profile.

Enterprise Products has raised its distribution every year since its 1998 IPO, and over the past decade, its annual distribution hikes have averaged just under 6%.

At today’s prices, EPD shares yield 6.4%, which is exceptionally high by this MLP’s standards.

This article first appeared at Kiplinger.com

Photo Credit: Berardo 62 via Flickr Creative Commons

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.