Skousen’s “The Most Important Event in 2015”

by Travis Johnson, Stock Gumshoe | June 10, 2015 1:01 am

Who's been building a "secret" pipeline?

Mark Skousen[1] has caught our attention with his big promises and teases several times over the years, and this latest pitch of his looks like a doozy — he’s saying that he has identified the “most important event in 2015,” and that this accomplishment has been completed in “secret” … so what’s the story?

Well, here’s a bit of the intro, from his publisher Roger Michalski:

“A Single Company is Set to Do Something No Company Has Done Since the 1970’s…

“Here’s Why It Could Lead to Record Amounts of Cash….

“In short, a new energy company (virtually unknown to most Americans) has secretly gone about creating an alternative pipeline system that’s set to generate billions in new revenue…

“The series of projects, already approved and in operation, is six times larger than Keystone.

“Keystone XL’s pipeline at maximum capacity can transport 830,000 barrels per day… Approximately $77 million worth at today’s prices.

“By comparison, this company’s pipeline system can transport more than 5 million barrels every day… About $465 million worth!”

Ah, that sounds a bit familiar. This is a pitch he has made before, methinks — the basic idea is that we’ve been distracted by the fight over Keystone XL, but while we weren’t watching this secret company has built an “alternative pipeline.” By that same measure, of course, we could say that almost any pipeline company has built an “alternative” to Keystone — any pipeline company of decent size carries more than Keystone XL was projected to move on a daily basis, though, of course, those pipelines have been built over decades to meet local and regional needs, not as quick strategic responses to the “yes or no” on Keystone XL.

But in this case he’s implying that the connection is even more direct…

“While everyone was shouting about Keystone, they quietly built another set of pipelines capable of getting our energy to market.

“And it’s set to make the company extremely wealthy… Along with its shareholders….

“They’ve got 1,278 miles of offshore pipeline transporting natural gas[2].

“They have a 633 mile pipeline flowing from Cushing Oklahoma down to the Gulf Coast region. A 1,769 mile pipeline connecting North Texas… A 674 mile pipeline to West Texas. Another 866 mile system to south Texas….

“They have onshore natural gas pipelines connecting Mississippi, Louisiana, Wyoming, Colorado, and New Mexico[3].

“They also just completed new pipelines that connect them to value Ethane supplies in the Marcellus and Utica Shale regions…

“In total, they have 50,000 miles of pipeline in operation, enough to criss-cross the United States more than 16 times.”

And, since it is a pipeline company, you’ll be unsurprised to hear that most investors are interested in it primarily for the dividends[4] — pipeline-owning MLPs have been a hot income sector for the past decade or so, in spite of a few hiccups (and a substantial downturn in recent months, thanks to the double-whammy of falling oil[5] and gas prices and fear of rising interest rates). Here’s one more little blurb from the ad:

“The CEO says the company also ‘increased its cash distribution rate each of the last 38 consecutive quarters.'”

So who is it? As you have no doubt guessed, Skousen here is again teasing Enterprise Products Partners (EPD)[6], which he also touted last November using a very similar argument[7]. It sounds pretty impressive, frankly — a company with a huge pipeline network, one of the largest in the country, and with perhaps a competitive advantage because Keystone XL won’t be approved…

… but it also sounded pretty much equally impressive back in November, and was pitched with the same kind of urgency, when the shares were priced at about $40 and came with an anticipated yield of 3.75%. That yield wouldn’t be nearly enough to cushion you from the fact that the shares have fallen by more than 20% in the last six months… now you can buy EPD, if you wish, for about $31 and anticipate an income yield of about 4.75%. That seems much more compelling.

EPD has come down for the same reason the other MLPs have come down, of course — you don’t have to do a lot of deep analysis of every single pipeline and natural gas plant they own and what the margins might be (though you can, if you want to try to identify pockets of opportunity), in the absence of real company-specific news (like a poor capital investment, or debt problem, or a disaster of some kind) the large pipeline companies generally trade as a block. And their share prices generally move based on expectations of gas and oil production volume, and on expectations of interest rates. If oil and gas production drops meaningfully or there’s no need for new pipelines to be built or expanded, their potential “toll” income drops… and if interest rates rise meaningfully, they look less compelling as income investments compared to “safe” bonds and their own borrowing costs are likely to rise.

So it might well be that Enterprise is finally becoming value priced again — I’d argue they might not be there just yet, but it wouldn’t take much more bad news or market weakness to bring the price down a little more. It’s important to be mindful of just how powerful interest rates are as a part of the value equation for income investments — the 10-year note is really the benchmark, since that’s what an individual investor might reasonably be expected to earn on long-term savings without any real risk of loss, and while EPD’s yield has bounced around some and been a bit more volatile than interest rates, it’s unusual for it to not trade at at least a couple percentage points of premium to the 10-year note. Sometimes a lot more, if risk perceptions are high like in the financial crisis. So if the 10-year note were to jump to 4% in the next year, for example (most people think that would be far too rapid a rise, but you never really know), and EPD then had to have a 6.5% yield to appeal to investors, that would mean — assuming the dividend grows 5% over the next year, which would be fairly typical for them, then to earn a 6.5% yield from EPD you’d need the share price to come down to $24 (so, down another 20%+ from here).

That’s not to say this is how it will play out, for sure, that’s just an example — but it’s a reminder that a rising dividend doesn’t guarantee you a stable stock price — EPD is a very well-run pipeline partnership, they’re investing now to expand in South Texas and trying to be opportunistic about buying some of the assets that oil and gas companies need to offload to fix their balance sheets, the company pays out a rising distribution each quarter (now 43 quarters in a row of increases — so Skousen’s teaser hint’s a bit old), and it will probably be a very successful investment if you can hold it for a long period of time… but I wouldn’t rush into large purchases of income stocks at this point, I’d rather scale in slowly and buy small amounts over time, the price you pay matters and even a 4.75% yield is historically quite low. I’m starting to consider EPD a bit more appealing as the yield creeps up… it’s possible that my caution will cause me to miss out if the yield dips back down from here, but I don’t own any MLPs at the moment.

If you’re curious about Master Limited Partnerships[8], by the way, do make sure you understand what you’re buying before you invest in these kinds of “stocks” (they’re not technically stock, they’re “units” — and they don’t pay dividends, they send you “distributions”). MLPs are not corporations, they are pass-through entities that avoid corporate tax and are designed (sort of like a Real Estate Investment Trust) to pass through the vast majority of earnings and tax obligations to shareholders.

In practice, almost all MLPs pay out vastly more in distributions than they earn in income, largely because depreciation charges are a huge accounting cost for them but repair and replacement cash costs are generally much lower… so they generate much more in what they call “distributable cash” than they do “earnings”, and since these entities exist to provide income for shareholders they pay out a large portion of their “distributable cash” in the form of distributions to shareholders. Since it’s not a profit from the MLP, it’s not taxable as income — it’s treated as a return of capital from the partnership to the unitholders, which means that it reduces your cost basis in the shares but doesn’t incur a tax liability until you sell the shares and get the capital gain of that lower cost basis. REITs[9] do this to a limited degree as well, sometimes, but it’s a much bigger deal for MLPs. That makes MLPs a great tax-deferral investment, since you collect (and can reinvest and compound) those cash payouts but don’t owe taxes on much of it until you sell… and unless they’ve changed the law on this, you can even pass MLP shares to your heirs at a stepped-up cash basis and that tax liability of the lower cost basis would disappear entirely if no one ever sells. I have not checked to see what EPD’s recent return of capital vs. income is as a percentage of their distributions (ie, how much is taxable income you have to recognize in the year you’re paid, vs how much goes to reducing your cost basis).

For people who invest very large sums, there’s also potential risk from generating what the IRS calls unrelated business taxable income (UBTI) if you hold MLPs in tax-deferred accounts — but you probably wouldn’t want to have a MLP in a tax-deferred account anyway, since that gets rid of one major reason to own them (their tax efficiency), and UBTI does only hit over a pretty high threshold, and the threshold is of passed-through income, not distributions, so that’s not a real-world concern for most small investors.

Since you’re a limited partner, MLPs will send you a K-1 partnership income tax form and you’ll have to file a tax form yourself to recognize your share of the partnership’s income. These can be a pain in the neck, particularly if you’re incur that recordkeeping and filing hassle for just a handful of shares of a dozen different MLPs, so keep that in mind. There’s also potential for you to incur state tax liabilities in states where you don’t live, though I’ve only ever heard of this as a potential liability and have never met a shareholder who filed in a bunch of different states because one of their MLPs generated income in all those states. It probably becomes more of an issue with large holdings, but I’m certainly not a tax expert so please do familiarize yourself with MLPs and ask your tax advisor before jumping into these kinds of investments — in my experience there’s a lot of fearmongering about the horrible potential tax risks or recordkeeping demands of MLPs, and that’s probably overdoing it, but there are risks and liabilities to be aware of. Most MLPs are in the energy sector, and most investors know what they’re getting into when they buy them, but sometimes K-1 forms and tax implications come as a surprise in late February — even more so for the less typical MLPs, like megacap investment bank/asset manager Blackstone (BX).

So that’s all we’ve got for today — whaddya think, is Enterprise Products Partners looking more appealing now as the falling share price gets the dividend closer to 5%? Have a good outlook for pipelines and natural gas processing plants? Let us know with a comment below.

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