Five MLPs Hedge Funds Love

With crude and natural gas close to trading for prices not seen in a decade, many stocks in the MLP sector are beaten up. Because there are always diamonds in the rough for any sector, we decided to make a list of MLPs that the smart money loves. Therefore, in this article, we are going to take a closer look at Energy Transfer Equity LP (NYSE:ETE), Enterprise Products Partners L.P. (NYSE:EPD), Williams Partners LP (NYSE:WPZ), Boardwalk Pipeline Partners, LP (NYSE:BWP), and Plains All American Pipeline, L.P. (NYSE:PAA).

But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see the details here).

#5 Plains All American Pipeline, L.P. (NYSE:PAA)

– Number of Hedge Fund Holders (as of September 30): 16
– Total Value of Hedge Fund Holdings (as of September 30): $90.86 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 0.80%

After Kinder Morgan Inc (NYSE:KMI) cut its dividend by 75%, some investors speculate Plains All American Pipeline, L.P. (NYSE:PAA) could reduce its dividend as well. Plains All American has a debt-to-EBITDA ratio of around 5.4x and dividend distribution coverage of below 1x. With large capital expenditures planned, investors are unsure how long management will keep the dividend. Making things worse is ratings agency Moody’s placing the firm’s credit rating on negative outlook on December 7. It’s not all bad news, however, as Plains All American Pipeline still has a Baa2 rating (Baa3 is one level above junk status). Jim Simons’ Renaissance Technologies was among the 16 hedge funds that owned the stock at the end of the third quarter.

#4 Boardwalk Pipeline Partners, LP (NYSE:BWP)

– Number of Hedge Fund Holders (as of September 30): 17
– Total Value of Hedge Fund Holdings (as of September 30): $170.19 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 5.80%

Boardwalk Pipeline Partners, LP (NYSE:BWP) announced $83.6 million in distributable cash flow for the quarter ended September 30, on operating revenues of $294.1 million. Distributable cash flow fell by 47% year-over-year, while the company’s operating revenues rose by 5% as weak energy prices weighed on Boardwalk’s results. Although shares are off by 37.79% year-to-date, 17 funds that we track were long the stock at the end of the third quarter, up from 15 funds a quarter earlier. Alec Litowitz and Ross Laser‘s Magnetar Capital owned 6.67 million shares of Boardwalk at the end of September.

– Number of Hedge Fund Holders (as of September 30): 19
– Total Value of Hedge Fund Holdings (as of September 30): $170.02 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 0.90%

Because of new pipelines and processing plants coming online, Williams Partners LP (NYSE:WPZ), enjoyed an adjusted EBITDA increase of 21% year-over-year to $1.1 billion in the third quarter. Distributable cash flow more than doubled to $754 million for the quarter, from $367 million posted a year earlier. Because of the increase in cash flow, the company has a cash distribution coverage ratio of 1.04x, more than enough to cover the dividend payouts. However, given the further fall in natural gas prices since September 30, this may not be the case going forward. John Orrico‘s Water Island Capital was among the 19 elite funds that were long the MLP, according to the latest round of 13F filings.

#2 Enterprise Products Partners L.P. (NYSE:EPD)

– Number of Hedge Fund Holders (as of September 30): 21
– Total Value of Hedge Fund Holdings (as of September 30): $210.07 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 0.40%

Given Enterprise Products Partners L.P. (NYSE:EPD)’s good management, decent dividend distribution coverage, and solid balance sheet, it’s not surprising that all 14 analysts covering the stock have ‘Buy’ ratings. Analysts at Deutsche Bank have a $30 price target, while Argus has set a $38 target. The buy-side is also becoming a little bit more optimistic, with the number of funds long the stock increasing by one quarter-over-quarter to 21 at the end of September. Shares of the company yield 6.57%, indicating the market’s confidence in the dividend.

#1 Energy Transfer Equity LP (NYSE:ETE)

– Number of Hedge Fund Holders (as of September 30): 27
– Total Value of Hedge Fund Holdings (as of September 30): $709.74 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 3.20%

With shares down by almost 60% year-to-date and now yielding 10.28%, many hedge funds like Energy Transfer Equity LP (NYSE:ETE), as it is fast becoming a value stock. Although the company’s management could pull  a ‘Kinder Morgan’ and cut the dividend distribution in light of the challenging industry conditions (perhaps leading to more short term bloodletting), the stock has a substantial long-term upside as Energy Transfer Equity’s future merger with Williams Companies Inc (NYSE:WMB), if approved, should yield $2 billion in annual EBITDA synergies by 2020. Richard Perry’s Perry Capital owned 3.96 million shares of Energy Transfer Equity at the end of September.

Disclosure: none