Thursday, November 20, 2008
(Cont'd from above)...

Jim:     

I like the energy-oriented Master Limited Partnerships... These are companies that get tax-favored treatment by Uncle Sam, as long as they distribute the vast majority of their profits to shareholders - you - in the form of a big, juicy dividend...

So, again... think Kinder Morgan Energy Partners (KMP), Energy Transfer Partners L.P. (ETP)... two companies that operate pipelines and pay out dividends that more than satisfy Sir Mix-a-lot's first corollary (e.g., I like big dividends and I cannot lie)... But, of course, they got slaughtered, just like everything else today...

But, unlike the others, given the fact that they are not dependent on the price of energy... but just energy being bought... for heating, for cold... I regard these declines as opportunities.

But not all Master Limited Partnerships are equal... MLPs that have to survive will, in many cases, have to cut their dividends... and these belong in the Sell Block...

We tend to talk about two kinds of energy MLPs... exploration and production plays on the one hand... and gathering and transportation plays, like KMP and ETP...

We get asked so many times on the Lightning Round about these that I thought I ought to spend some time distinguishing them.

Obviously, with the price of crude at $49, you want to avoid the MLPs - many of which you call about everyday - that rely on producing and selling oil and natural gas too. Linn Energy, LLC (LINE), which I have liked, but holy cow... Permian Basin Royalty Trust (PBT), which I have liked, but holy cow... These have become more risky than when I first recommended them, because energy, like every other commodity... like every other entity, other than Treasuries, has totally collapsed...

But they're actually not the ones I'm here to warn you about, because many of them are hedged, so they can withstand lower prices.

What you really need to worry about are dangerous members of a third kind of MLP, and it's the ones you call about most frequently, because their yields are so big... the gathering and processing MLPs that are unsafe...

In general, these companies collect natural gas that comes out of a well, dehydrate it, treat it, make it worthy of long-distance pipeline transmission, and sometimes convert it into natural gas liquids... which are the feed stocks, like ethane used in chemical plants... Most of the money that these MLPs make is predominantly affected either by the price of natural gas, or the price of oil... as the price of the natural gas liquids they sell are usually more corollated to the price of crude than that of natural gas...

You don't want to own an MLP with exposure to oil prices or natural gas prices... where natural gas is holding at around $6... oil... I don't know... in the $40s now...

Because those commodities have come down so hard, the distributions that these MLPs pay out are truly at risk...

So what's the difference here?...

A company like KMP has a safe distribution, because it just gets paid pretty much for running a toll road for the volume of gas that goes through its pipes. Not so for these more dangerous MLPs that you ask about every night...

So who are they?...

The three MLPs that I'm throwing in the Sell Block tonight are Williams Partners L.P. (WPZ), Atlas Pipeline Partners LP (APL) and DCP Midstream Partners LP (DPM)... Crosstex Energy LP (XTEX), a similar MLP, already cut its (dividend) distribution on October 31st, knocking the stock down 14.5% in one day. It's down 64% since. I'm worried that the other three may be forced to cut their distributions too, following in XTEX's footsteps.

I've never recommended them... although I did recommend Atlas Energy Resources LLC (ATN), a sister exploration and production company to APL... I thought it would be good, and it's been crushed. I didn't anticipate this kind of decline in oil, and I own that mistake. I didn't think that oil would get to the $40s, when it was in the $140s a couple of months ago...

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The Bottom Line!:     Principal has to stay in the Sell Block, along with Williams Partners L.P. (WPZ), Atlas Pipeline Partners LP (APL) and DCP Midstream Partners LP (DPM), and, you know... I've got to tell it like it is... millions of people are losing trillions of dollars... I'm trying to keep it so fewer of the million lose fewer of the trillion... Noble?   No. Just trying.

Read Jim's next Segment here