Any comments on MLPs tanking?

[bobs]

LINN seems to have dragged the sector down or maybe it's just the move up in interest rates??

[dan_s]

Stofel sent out a note on LINE today. They lowered its price target given the uncertain future of an SEC investigation revealed earlier this week. Stifel maintained its Buy rating on Linn but lowered its price target from $48 to $33 on the master limited partnership Linn Energy (LINE) and its corporate trading entity LinnCo (LNCO).

“If the BRY/LNCO deal falls through and the company NEVER makes additional accretive acquisitions (extremely doubtful in our opinion), we believe LINE units are worth approximately $22 using a discounted cash flow analysis. However, if the BRY/LNCO acquisition falls through but company maintains a conservative acquisition program through 2020, we estimate LINE units to be worth $32 to $35. If we assume the BRY deal is completed in 4Q13, we estimate LINE units intrinsic value to be $35-$40 based on a future discounted cash flow analysis and assuming a conservative future acquisition program.”

[dan_s]

There are only a dozen or so upstream MLPs. Since LINE is the largest, I can see how its issues put a bit of a dark cloud over the entire subsector. A small increase in interest rates should not have that much of an impact. Remember, MLPs are not fixed income like bonds. Production rates and commodity prices are much more important to upstream MLPs.

Keep in mind that LINE is audited by KPMG. Those guys are not idiots. I'm sure they took a real hard look at their accounting for the hedges. My only concern is that this "noise" causes BRY to pull out of the merger.

[dan_s]

In selecting an MLP, your primary focus should be on their annual increase in distributions. All of the MLPs in our High Yield Income Portfolio were selected because they have strong cash flows and a strong commitment to increase their distributions. I recently added HCLP because I expect it to increase distributions from $1.90/year today to $2.10/year in 2014. HEP has increased distributions each year of its existence.

On June 25th President Obama gave a speech about climate change, focusing on carbon emissions. His implicit support for natural gas as a replacement for coal is very bullish for most of the MLPs we track. Obama's followers are keen on renewables but even they realize that renewables cannot compete with coal on pure economics. Natural gas is the only fuel that can reduce our use of coal for power generation.