Top picks 2013: El Paso Pipeline Partners
This pipeline operator trades at a discount to its peers and offers a 6% yield.
My top conservative pick for the coming year is El Paso Pipeline Partners (EPB), which derives virtually all of its income from fee-based operations with limited sensitivity to commodity price swings.
The unit price has fully recovered from a swoon in mid-November. Yet with a yield of over 6%, it still trades at a discount to its midstream peers.
The primary reason for the discount is that the MLP's general partner, Kinder Morgan (KMI), collects incentive distribution rights (IDRs) from El Paso Energy Partners.
From an MLP unitholder's perspective, it's always best to pay little or no IDRs. But the difference in valuations between those that pay and those that don't, is well out of proportion to economics.
For comparison, Enterprise Products Partners (EPD) is an investor favorite in the sector that does not pay IDRs.
However, El Paso yields a percentage point more than Enterprise. And El Paso's targeted annual distribution growth rate of 9% is three percentage points higher than that of Enterprise.
El Paso actually grew its payout by 18% plus over the last year, a rate three times Enterprise's. And that growth in the next few years will be fueled by the very highest percentage of sources, mainly asset drop downs from parent Kinder Morgan.
El Paso will fund these drop downs with very low cost capital. An recent $475 million 30-year bond offering, for example, will pay just 4.7% to maturity. That's virtually identical to the 4.5% yield-to-maturity Enterprise pays on its 30-year debt.
A deal inked in mid-November to build a Mexican gas pipeline under a 25-year transportation contract demonstrates how increased scale under Kinder has enhanced El Paso Energy Partners' ability to participate in distribution-boosting deals. El Paso Pipeline is a buy anytime it trades under $38.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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