Energy MLPs and Royalty Trusts Analysts Love - Marc Courtenay

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Energy MLPs and Royalty Trusts Analysts Love
Jun 16, 2008 05:27 PM UTC

Marc Courtenay

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Symbol	Sentiment	Start	Return	Closed
HGT		06/16/08	-77.84%	--
XTO		06/16/08	n/a	--
PXD	n/a
PSE		06/16/08	+21.67%	--

Via Long Investment Ideas from Seeking Alpha:

When Pioneer Resources (NYSE:PXD) spun off it's lucrative pipeline business, creating the Master Limited Partnership [MLP] Pioneer Southwest Energy Partners (NYSE:PSE), I was one of the lucky investors who was able to participate in the offering.

Of course I didn't get all the shares I had indicated for so we bought the rest in the secondary market (the IPO was priced at $19 and we were able to buy the rest around $19.25). We were told the initial pay out yield would be around 9% or higher, and having been a former shareholder of PXD we were favorably predisposed to this company's reputation.

Now at least five and perhaps 6 brokerage firms started PSE with their highest rating citing its attractive valuation, high quality assets, lack of debt, and its affiliation with sponsor Pioneer Natural Resources. Since then the shares have shot up over 6%, recently reaching a new high.

Pioneer Southwest is a Master Limited Partneship [MLP] formed by oil and gas explorer Pioneer Natural Resources to own producing oil and gas properties in West Texas and to acquire oil and gas assets in its area of operations.

"Pioneer Southwest is a high quality upstream MLP with a visible growth profile, strong sponsor, and stable base of low decline crude oil reserves located in the Permian Basin," Wachovia analyst Michael Blum said in a research note.

Citigroup analyst Richard Roy said, "While the trading of Pioneer Southwest Energy Partners units is being impacted by the malaise in the sector, the partnership is not suffering from integration, overhang and leverage issues relative to its peers.

"As a result, given the benefit of hedging, strong underlying fundamentals, and favorable long term acquisition economics, we believe the valuation is attractive at current levels."

Roy added Pioneer Southwest to his "Top Picks" list.

UBS analyst Ronald Barone said, "We view Pioneer Southwest's affiliation with Pioneer Natural Resources as a key benefit, particularly since Pioneer Natural Resources controls estimated proven reserves of 558 mmboe (million barrels of oil equivalent) in Pioneer Southwest's core area."

Barone also said Pioneer Southwest should enjoy flexible financing options, aided by its initially debt-free capital structure. This would create an advantage for the company as it competes for upstream asset acquisitions.

Pioneer Southwest is a Master Limited Partneship [MLP] formed by oil and gas explorer Pioneer Natural Resources to own producing oil and gas properties in West Texas and to acquire oil and gas assets in its area of operations.

"Pioneer Southwest is a high quality upstream MLP with a visible growth profile, strong sponsor, and stable base of low decline crude oil reserves located in the Permian Basin," Wachovia analyst Michael Blum said in a research note.

Citigroup analyst Richard Roy said, "While the trading of Pioneer Southwest Energy Partners units is being impacted by the malaise in the sector, the partnership is not suffering from integration, overhang and leverage issues relative to its peers.

"As a result, given the benefit of hedging, strong underlying fundamentals, and favorable long term acquisition economics, we believe the valuation is attractive at current levels."

Roy added Pioneer Southwest to his "Top Picks" list.

UBS analyst Ronald Barone said, "We view Pioneer Southwest's affiliation with Pioneer Natural Resources as a key benefit, particularly since Pioneer Natural Resources controls estimated proven reserves of 558 mmboe (million barrels of oil equivalent) in Pioneer Southwest's core area."

Barone also said Pioneer Southwest should enjoy flexible financing options, aided by its initially debt-free capital structure. This would create an advantage for the company as it competes for upstream asset acquisitions.

According to a Reuters report there were specific price targets given by five of the brokerage firms which initiated coverage on PSE.

Following are the five brokerages ratings and price targets on Pioneer Southwest Energy Partners LP:

Citigroup Buy $25.50
UBS Buy $25.00
Wachovia Outperform -
RBC Capital Markets Outperform $26.00
Raymond James Outperform $24.00

Another MLP we own and like very much is TC PipeLines (Nasdaq:TCLP) which together with its subsidiaries, transports natural gas from the western Canada ) Basin [WCSB] to various downstream markets in the United States.

It owns a 46.45% general partner interest in Great Lakes Gas Transmission Limited Partnership, which owns a 2,115 miles natural gas pipeline system that extends across Minnesota, Northern Wisconsin, and Michigan and redelivers gas at the Canadian border at Sault Ste. Marie, Michigan, and St. Clair, Michigan.

The company also owns a 50% general partner interest in Northern Border Pipeline Company that transports natural gas through a 1,249 miles of pipeline, which provides pipeline access to the midwestern United States from natural gas reserves in the WCSB. It's yield is currently over 7% and it returns capital as well.

While on a related topic, now is also a good time to mention Hugoton Royalty Trust (NYSE:HGT) which creates an income stream that few investments can offer.

HGT operates as an express trust in the United States. It holds 80% net profits interests in certain natural gas producing working interest properties, owned and operated by XTO Energy, Inc. (NYSE:XTO).

XTO Energy engages in the production and sale of oil and gas in the Hugoton area, which covers Texas, Oklahoma, and Kansas; the Anadarko Basin of western Oklahoma; and the Green River Basin of southwestern Wyoming.

As of December 31, 2007, the company owned interests in 408,636 gross producing acreage of developed property, as well as in 54 gross oil producing wells and 1,540 gross gas producing wells. XTO Energy had proved reserves of 405,473 thousand cubic feet of gas and 3,645 barrels of oil. Hugoton Royalty Trust was founded in 1998 and is based in Dallas, Texas.

Having just reached a 52-week high of $34.70 it is challenging to estimate the upside potential of this trust. Frankly, if there is at least a 5% correction I'm personally intending to buy more. I'd also like to buy some XTO on a correction...if one actually develops.

These income-producing MLPs and Royalty Trusts are like cash cows waiting to be gently milked for all they are worth. And like a good producing bovine, their utter keeps filling up with sweet "milk" shortly thereafter.

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