Ideas for High Yield Investors

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Ideas for High Yield Investors

Post by dan_s »

67 WALL STREET, New York - May 12, 2010 - The Wall Street Transcript has just RE-PUBLISHED its Oil & Gas Production and Distribution Report offering a timely review of the sector to serious investors and industry executives. This Special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Master Limited Partnerships - MLPs v. The Broader Market - Canadian Pipeline - Natural Gas Growth - The Integrated Gas Space - Rebound in MLP Prices - Appeal for Long-Term Investors - Natural Gas-Fueled Transportation - Decrease in Marginal Cost of Production

Companies include: EOG Resources (EOG); Energy Transfer Partners (ETP); Lion Energy Corp. (TSX.V-LEO); Natural Gas Services Group (NGS); Newfield Exploration (NFX); Pembina Pipeline (PIF-UN.TO); and Suburban Propane (SPH); , Plains All American Pipeline LP (PAA); and many more.

In the following brief excerpt from the Re-published Oil And Gas Report, expert analysts discuss the outlook for the sector and for investors.

JOHN D. EDWARDS, CFA joined Morgan Keegan in October 2006. Mr. Edwards began his career in the energy industry with Edison International, where he worked in regulatory finance, M&A, project finance and business development. He received his B.A. from Occidental College in Los Angeles and an MBA from California State University, Fullerton. He is also a member of the Financial Analysts Society of Houston.

TWST: In general terms, what's going on in that space so far this year?

Mr. Edwards: So far this year, it's actually been extremely positive. The total return in the sector is over 60%, so it's been a very strong year.

TWST: What's driving that?

Mr. Edwards: The main driver has been falling cost of capital and the capital markets moving from a dysfunctional mode to relatively normal functioning. I mean we still have a little ways to go in that regard, but that's been the primary driver.

TWST: So you've had that good performance despite lackluster pricing in the industry?

Mr. Edwards: Pricing - in as far as commodity pricing goes - is not as big a factor in the sector, although there is some exposure to that. But yes, we were just looking at the quarterly a week ago or so - the quarterly EBITDA change year-over-year - and it was relatively flat.

TWST: Why doesn't the pricing have much of an impact? I know pipelines are longer term, is that the key?

Mr. Edwards: The key is that a lot of the pipelines, they're contracted under long-haul agreements in which the payment is for capacity, whether the customer ships product or not. That's not to say that there aren't certain cases where companies make money on the pricing differentials between certain nodes within the pipeline network. And so there still can be commodity exposure in the sector.

TWST: Does the low commodity price have a longer-term effect in terms of spending in the space?

Mr. Edwards: It can. Ultimately, when you have higher prices that stimulates activity in a lot of the emerging shale plays. That in turn will stimulate the need for gathering facilities as well as pipelines to take that product to where it can be used.

TWST: Where will the growth be in this space? In these new plays?

Mr. Edwards: It is. I mean there is clearly going to be a need for infrastructure in some of these emerging shale plays. The ones that are most commonly talked about are the Haynesville Shale in Northwest Louisiana, the Marcellus Shale in Pennsylvania, New York Appalachian area and the Eagle Ford Shale in the southern part of Texas.

TWST: Are the companies out in the marketplace at this point looking for funds, or do they have enough on the balance sheet to go ahead and do what they need to do short term?

Mr. Edwards: As you know, as we talked about before, the master limited partnerships, they tend to be serial issuers in terms of need to fund their projects because a very large percentage of the cash flow that they generate is paid out to unitholders.

TWST: Anything on the horizon from a regulatory point of view that the industry has to worry about?

Mr. Edwards: As far as pricing goes, we talked about this before, there is a formula that the FERC uses to adjust pricing for long-haul pipelines, and it's mostly on the liquid side. And it's a formula - it's PPI (producer price index) plus an adder. It's actually going to be a positive in that it's a PPI-plus number. So the adjuster from mid-2009 was based on what the PPI did in 2008. The one for 2010 is based on what the PPI did in 2009 and, as you know, it's been flat to slightly down in 2009. So there could be a little bit of a negative overhang there. As far as other regulatory developments, the FERC last week initiated an investigation into the rates charged by three gas pipelines - Northern Natural, Great Lakes and Natural Gas Pipeline of America - to determine if they were "over-earning." This move by the FERC represents the first FERC-initiated pipeline rate proceeding in over a decade. We don't think it represents a broad-based regulatory assault on the industry since ROE on pipelines generally have been falling over the last 15 years. Moreover, there is still a significant need for additional energy infrastructure, so any rate decisions that could be viewed as confiscatory, overly negative or punitive could have adverse consequences on capital needs for the industry, and from a broader policy context would frustrate job creation in what remains very high unemployment conditions in the labor market. We believe that the FERC is well aware of the longer-term capital requirements of the industry and has been generally supportive of infrastructure development.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Ideas for High Yield Investors

Post by dan_s »

I get a lot of e-mails from our EPG members asking me to cover the Canadian Trusts and other High Yield investments. So, I will be adding a High Yield Portfolio with 10-12 of my favorites. It will probably be in July so be patient. The list will likely include BTE, ERF, PWE, KMP, EPD and LINE.

Dan
Dan Steffens
Energy Prospectus Group
sansonetx
Posts: 30
Joined: Sat May 15, 2010 9:23 am

Re: Ideas for High Yield Investors

Post by sansonetx »

I have been an investor in MLP's for about 9 months now.Great returns...7% to 12% depending on when you bought.Also,tax benefits are interesting.MLP investing seems to be better for the buy and hold investor as you are dealing with K-1's at tax time.This is more complicated for me to give any information but I love the distributions.
par_putt
Posts: 565
Joined: Tue Apr 27, 2010 11:51 am

Re: Ideas for High Yield Investors

Post by par_putt »

.This is more complicated for me to give any information but I love the distributions.[/quote]
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At my age I don't need 'complicated'.
Does it help to use an IRA account ?
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Ideas for High Yield Investors

Post by dan_s »

par-putt;

I would not recommend putting MLP's in an IRA as you will lose the primary tax benefits. Most of the distributions from an MLP are "return of capital" (which means they are non-taxable). Basically, you'd be putting a tax shelter into a tax shelter (your IRA) which is not a good idea.

They are not really that complicated.
1. You buy units in an MLP just like stock.
2. Cash distributions come to your brokerage account just like dividends.
3. At tax time, you ignore the distributions and pick up what's on the K-1. The taxable portion of the distributions is usually a very small percentage.
4. You need to reduce the tax basis in the units by the non-taxable (return of capital) portion of the distributions

The Canadian Trusts are also best held outside an IRA (although I have some in mine). They withhold 15% Canadian income tax from all distributions. If you hold them directly (not in your IRA) you get the Canadian income tax back as a foreign tax credit so it is no big deal. Turbo Tax or your tax return preparer can handle this easily. It just takes one more form at tax time.

As I mentioned in a previous post, you can increase your yield on MLPs and the Canadian Trusts by selling Covered Calls against them. This also reduces your risk but it does cap your upside.

Dan
Dan Steffens
Energy Prospectus Group
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