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Value Investing

More Upside for These Turnaround Stories

By Roger S. Conrad, on Sep. 4, 2014

In 2009 and 2010, master limited partnerships (MLP) that suffered the most when commodity prices collapsed rallied hard from the huge losses posted in the previous years.

Atlas Pipeline Partners LP and Eagle Rock Energy Partners LP (NSDQ: EROC), both of which slashed their distributions because of financing constraints and/or their sensitivity to energy prices, didn’t enjoy a recovery rally until they restored their payouts in 2011.

Although the 2009-10 recovery rally stands out as a unique period in recent market history, one lesson bears repeating: Investors shouldn’t offhandedly dismiss beaten-down names that operate out-of-favor business lines.

For example, Niska Gas Storage Partners LLC (NYSE: NKA) emerged as one of the top-performing MLPs in 2012 after losing almost half its value in 2011.

Surging hydrocarbon production from prolific shale plays has reduced the seasonal spread between natural-gas prices in the winter and summer—a key driver of storage demand.

In this environment, Niska Gas Storage Partners faced a cash flow crunch because expiring storage contracts renewed at dramatically lower rates. Speculation that the MLP would slash its distribution ran rampant.

But Niska Gas Storage Partners’ general partner suspended its subordinated distribution indefinitely in the second quarter of 2012, ensuring the partnership would maintain the payout disbursed to common unitholders—a short-term upside catalyst for the beaten-down stock.

Likewise, Capital Product Partners LP (NSDQ: CPLP) delivered a 76.7 percent return in 2013, thanks to a supportive general partner that helped the partnership to maintain its distribution by engaging its product tankers and other vessels at above-market rates during a period of general weakness.

Bottom fishing enables intrepid investors to lock in huge yields but also entails significant risk if no upside catalyst emerges. If Niska Gas Storage Partners and Capital Product Partners’ general partners hadn’t offered a helping hand, these names wouldn’t have outperformed and likely would have cut their distributions.

Consider some of the worst-performing MLPs from recent years: cash flow-constrained names that ultimately opted to slash their distributions to shore up their balance sheets and wait for industry conditions to improve.

Earlier this year, Boardwalk Pipeline Partners LP (NYSE: BWP) slashed its distribution by more than 80 percent after expiring contracts on its long-haul gas pipelines severely crunched the MLP’s cash flow.

Eagle Rock Energy Partners and Natural Resources Partners LP (NYSE: NRP) likewise slashed their payouts in 2014, reducing unitholders’ income streams and saddling them with outsized capital losses.

With an eye toward value and capital preservation, we prefer to focus on potential turnaround stories where distribution growth has slowed or stalled, but the payout doesn’t appear to be under threat.

At the same time, management must have a credible plan to restore the MLP’s fortunes and exceed the market’s low expectations. Here’s our latest take on two of our favorite turnaround stories.

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