MLPs: Non-Oil & Gas Recommendations

Today we’ll be finishing off the MLP miniseries by taking a quick look at some limited partnerships outside of the oil and gas industries as well as two MLP-focused funds.

Coal MLPs
You might just want to take a gander at these since coal could be an integral part of President-elect Obama’s energy policy. They’re all trading at or very near their all-time lows so now could be a good time to begin adding one or two to your growth and income portfolio.

Alliance Res Partners (ARLP) & Alliance Holdings (AHGP). Alliance Holdings is the general partner component of Alliance Res.* (Please see explanatory note below.) Although earnings were off by 25% in the last quarter, analysts expect huge growth in 2009. The company has steadily increased earnings since mid-2006 inception.

Natural Resource Partners (NRP). The company reported record Q-3 revenues and increased distributable cash flow by 59%. It’s steadily increased distributions since 2002 inception.

Penn VA Resources Partners (PVR). Despite a decrease in third quarter earnings due to cash-payments to settle derivative contracts and higher interest expenses, the company CEO, James Dearlove, keeps an optimistic outlook: “At of the end of the third quarter, we had approximately $140 million of unused borrowing capacity under our $700 million revolving credit facility, which we believe provides adequate cushion to support our working capital needs and some modest growth opportunities. We are also confident that the fundamental characteristics of our business segments remain strong.”

Perhaps this is why this company has a higher distribution yield than the other two.

Fun & Done MLPs
There’s two other MLPs that I’d like to cover. One wants to make sure that you have a good time and the other steps in when your time is up.

Cedar Fair (FUN). (You gotta love the ticker symbol.) This limited partnership owns and operates amusement parks, water parks, and five hotels mostly in the Midwest and the Mid-Atlantic. Probably its most famous holding is Knott’s Berry Farm in Southern California. If you think that amusement parks have been suffering due to the recession, you’d be wrong. Revenues across the board have been up so far this year and Halloween sparked better than expected park attendance. Even if the economy worsens, the parks are closed until spring and by that time, the recession may have thawed. The major downside is debt, and the company has a lot of that. Paying down some of it might require the company to reach into its unitholders’ pockets and reduce some of that juicy 14% yield.

This is a riskier play, but it could eventually pay off handsomely.

StoneMor Partners (STON). This grab ’em/slab ’em company owns and operates 223 cemeteries mostly in the eastern part of the country. There isn’t much news to go on, but I did find that revenues are increasing along with the distribution payout which has increased steadily (although not as dramatically as some of the other MLPs) since it began in 2005. Revenue growth for the next five years is estimated in excess of 10%, not surprising considering the aging of the Baby Boomer generation. (Arg!)

Owning a piece of a plug isn’t the sexiest portfolio holding but it could be a very lucrative one in the long run. The bonus is that a passing cemetery will put a smile on your face instead of a frown, and when was the last time that happened?

MLP Funds
I was able to find two funds that engage in MLP investing. One good reason to opt for one of these instead of making your own MLP basket is for tax reasons. With the fund, you’ll get all of your necessary tax info in one form, and that could be a very, very good thing.

Bear Stearn Alerian (BSR). This is an exchange-traded note as opposed to a fund. What’s the difference? ETNs are subject to the credit risk of the issuing bank. If that doesn’t bother you, then check out this fund which tracks the Alerian MLP Index. (I betcha didn’t know there was an index that tracked MLPs.) What bothers me about BSR is that it’s only been around for a little over a year and it failed to make its September quarterly distribution. I’d really check into this one before buying.

Energy Income & Growth Fund (FEN). The fund has recently changed management but that hasn’t help the share price which has dropped almost 30% in the past ten days. Its top holdings include Magellan Midstream, Energy Transfer Partners, Kinder Morgan, Enterprise Product Partners, Plains All American, Crosstex Energy, Enbridge Energy, Nustar Energy, and Holly Energy—many of which were on my list of recommended picks yesterday.

Note that the trading volume on both of these funds is low. If you like the ETN, you can buy it at this level or lower if you can get it. I’d be patient, though, in picking up FEN which is not showing any signs of price support. If you can snatch it around $12 or less, you’ll be getting a yummy deal.

I hope you’ve seen some of the excellent advantages of adding MLPs to a long-term investment portfolio along with the disadvantages (mostly tax-wise) and potential risks running along the commodity supply-and-demand and short-term credit lines. I do think that despite these negatives, MLPs are a good value especially at these deflated prices, and I hope you think so, too.

Have a good weekend! Due your do diligence…or something like that.

*Note that many energy-related MLPs are structured where the partnership entity, that is, the company component that actually provides the services, is separated from the general or managing partner. Many MLPs offer both components as separate entities, each with their own ticker symbol. You can invest in either one but I prefer the partnership component because it pays a higher dividend. But if you’re cowed by the concommitant tax complications, consider swapping the higher dividend for the tax simplification offered by the general partner. (Consult your tax advisor for further details.)

Leave a Reply

You must be logged in to post a comment.