MLP Market Update. August 21, 2008

Transcription

1 MLP Market Update August 21, 2008

2 Table of Contents MLP Performance YTD Commodity Prices Impact on Business Fundamentals Access to Capital Valuations Positive Asymmetric Returns Conclusions Disclosure Past performance of the securities mentioned in this presentation is no assurance of future performance or market conditions. Investing in securities involves the risk of loss. This presentation is not a recommendation to purchase or sell any security or a solicitation of an offer to purchase any security. 2

3 Citigroup MLP Index YTD / 1/ 08 2/ 1/ 08 3/ 1/ 08 4/ 1/ 08 5/ 1/ 08 6/ 1/ 08 7/ 1/ 08 8/ 1/ April and May Strong MLP Q2 earnings Highest distribution growth in 2 years Return of traditional retail investors June and July Concern about domestic economy Higher correlation with S&P 500 3

4 Commodity Prices Fundamentals for the energy industry remain favorable Commodity prices jumped sharply in Q2 Though prices have retreated, producers continue to raise their drilling budgets Development of shale plays (unconventional resources) by independent E&P companies Crude Oil Natural Gas $160 $160 $15 $15 $140 $120 $150 $140 $130 $14 $13 $12 $11 $14 $13 $12 $100 $120 $10 $11 $80 $60 $110 $100 $90 $9 $8 $7 $6 $10 $9 $8 $40 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 $80 $5 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 $7 Source: FactSet Research Systems. 4

5 New Infrastructure Opportunities for MLPs 5

6 New Infrastructure Opportunities for MLPs 6

7 New Infrastructure Opportunities for MLPs 7

8 New Infrastructure Opportunities for MLPs 8

9 New Infrastructure Opportunities for MLPs New infrastructure needed for new gas basins in Rockies, MidContinent and Appalachia Gathering, processing and fractionation Pipelines for transport to end markets Storage Capex for New Infrastructure Year $ billion 2007A $ E E 10.0 $36.7 Source: Kayne Anderson Research 9

10 Refined Products Lower consumption of refined products due to high commodity prices and slowing economy Down 2.1% during first six months of 2008 compared to same period last year (Dept of Energy) Impact on refined products pipeline and terminalling MLPs Lower volumes are more than offset by inflation-adjusted tariffs (PPI + 1.3%) at FERC-regulated pipelines Ethanol blending is a new fee-based revenue stream 10

11 Access to Capital MLP Equity All Equity Financings 1 ($mm) Follow-on Offerings ($mm) 12,000 10,939 4,000 10,000 8,000 3,000 3,056 6,000 4,000 2,000 4,295 2,000 1, YTD 2007 YTD 2008 No. Of Offerings YTD 2007 YTD 2008 No. Of Offerings 4 18 Initial Public Offerings ($mm) Private Placements 1 ($mm) 2,000 1,876 10,000 8,427 1,500 8,000 1, ,000 4, YTD 2007 YTD 2008 No. Of Offerings 8 3 Source: UBS MLP Weekly. (1) Excludes equity issuances to related party entities. 2, YTD 2007 YTD 2008 No. Of Offerings

12 Perspectives on MLP Equity Issuance Needs $160 $ Billion $140 $120 $100 $80 $60 $135.0 $ Billion $160 $140 $120 $100 $80 $60 $135.0 $40 $40 $20 $4.3 $20 $11.5 $12.5 $14.2 $10.0 $0 MLP Market Cap Equity Raised in 2008 $0 MLP Market Cap Distributions at 8.5% Yield 2007A Capex 2008E 2009E Capex (1) Capex (1) Perspective #1 Average trading volume for MLP sector is $330 million 1 $4.3 billion raised in 2008 represents 3% of MLP market cap 14 days trading volume Perspective #2 Assuming 8.5% yield, MLPs throw off $11.5 billion in distributions annually MLPs annual cash needs are less than two-thirds of cash distributed to investors Many MLPs, especially gatherers and processors, have increased coverage ratios and are redeploying profits back into their businesses (1) Kayne Anderson Research Estimates. 12

13 Access to Capital - Debt MLPs have also been very active in the debt capital markets, raising more capital year-to-date 2008 than in the previous four years Bifurcation between investment grade and non-investment grade MLPs Most offerings have been investment grade For non-investment grade MLPs, access is more challenging leading to reliance on revolving credit facilities Debt Financings ($mm) 12,000 10,000 10,356 8,000 6,000 4,000 3,525 2,000 0 YTD 2007 YTD 2008 No. Of Offerings 9 30 Source: UBS MLP Weekly. 13

14 Gathering & Processing This is the most commodity-sensitive MLP sector, as revenues are often a function of gas and NGL prices The fractionation spread (a measure of how profitable it is to extract NGLs from the gas stream) is currently $0.70 per gallon compared to the historical norm of $0.15 per gallon Enterprise Products, the second largest MLP, reported strong earnings and cash flows for Q Cash coverage ratio now 1.4x compared to 1.1x in same period last year Retained more than $200 million to fund growth objectives while still increasing distribution ~7% YoY. Could approach $450 by end of year. Copano, MarkWest and Targa reported similarly strong results. Targa increased cash distribution by 22.8% YoY 14

15 2008 Distribution Growth In addition to strong earnings, many MLPs are benefiting from projects recently placed into service 2008 could be a record year for distribution growth despite weak unit prices Cash Distribution Growth 15% >12% 10% 5% 3.3% 3.2% 0% Q1 (a) Q2 (a) 2008 Estimate (b)(c) (a) Quarter over quarter (b) Year over year (c) Kayne Anderson Research Estimate 15

16 MLPs Appear Undervalued MLP Absolute Yield 1 MLP Yield 1 Spread to 10 Year Treasuries 11% % bps 9% 8% 7% Avg. = 7.3% 8.0% Yr Avg = 220 bps 6% 100 5% MLP Distribution Growth 2 6.6% Average 12.7% ~12.0% 6.7% 7.9% 7.6% 8.1% 8.8% 9.7% ~10.0% 5.3% 4.2% 4.0% (3) (3) E 2009E (1) Using the market cap-weighted, float-adjusted AMZ index which is weighted towards large-cap MLPs such as KMP and EPD which have low yields (2) Simple average of distribution growth for each MLP. Source: Smith Barney (3) Kayne Anderson Research Estimates. 16

17 Valuations Points to ponder MLP sector is poised to achieve distribution growth almost 2x its historical average of 6.6%, but is trading at a historically low valuation If the MLP space were to trade flat over the next 12 months and our distribution expectations materialize, the average yield in one-year could exceed 10% In our view, the 9% yield and 12% growth rate is attractive Achievable without major new expansions Achievable without major acquisitions Achievable without multiple expansion 17

18 Positive Asymmetric Returns Expected scenario: Assume current average MLP yield of 8.5% Next 12 months, expected distribution growth of 10% leads to ~19% total return Total Return MLP Yield Annual Distribution Growth 8% 10% 12% 6.94% 41.1% 43.7% 46.2% 7.00% 40.0% 42.5% 45.0% 7.50% 31.2% 33.6% 35.9% 8.00% 23.6% 25.8% 28.0% 8.50% 16.8% 18.9% 21.0% 9.00% 10.8% 12.8% 14.8% 9.50% 5.5% 7.3% 9.2% 10.07% 0.0% 1.8% 3.5% 10.27% -1.7% 0.0% 1.7% 10.46% -3.4% -1.7% 0.0% 10.86% -6.7% -5.0% -3.4% Current baseline return 18

19 Positive Asymmetric Returns (cont d) Downside scenario Assume MLP index declines 10%, causing yield to rise above 10% Total return expected to be close to zero, even though unit prices decline 10% Total Return MLP Yield Annual Distribution Growth 8% 10% 12% 6.94% 41.1% 43.7% 46.2% 7.00% 40.0% 42.5% 45.0% 7.50% 31.2% 33.6% 35.9% 8.00% 23.6% 25.8% 28.0% 8.50% 16.8% 18.9% 21.0% 9.00% 10.8% 12.8% 14.8% 9.50% 5.5% 7.3% 9.2% 10.07% 0.0% 1.8% 3.5% 10.27% -1.7% 0.0% 1.7% 10.46% -3.4% -1.7% 0.0% 10.86% -6.7% -5.0% -3.4% Significant downside protection from high yield and strong distribution growth 19

20 Positive Asymmetric Returns (cont d) Upside scenario: Assume MLPs trade at approximately 7% yield (which still represents an 80 bp discount to historical average spread to the 10-year Treasury Expected total return is almost 45% Total Return MLP Yield Annual Distribution Growth 8% 10% 12% 6.94% 41.1% 43.7% 46.2% 7.00% 40.0% 42.5% 45.0% 7.50% 31.2% 33.6% 35.9% 8.00% 23.6% 25.8% 28.0% 8.50% 16.8% 18.9% 21.0% 9.00% 10.8% 12.8% 14.8% 9.50% 5.5% 7.3% 9.2% 10.07% 0.0% 1.8% 3.5% 10.27% -1.7% 0.0% 1.7% 10.46% -3.4% -1.7% 0.0% 10.86% -6.7% -5.0% -3.4% 300 bps spread between average MLP yield and 10- year Treasury 20

21 Conclusions The favorably asymmetric return profile offered by MLPs is compelling Energy fundamentals are favorable, and development of unconventional resources creates new infrastructure opportunities for MLPs By historical measures, MLPs appear undervalued 21