Master Limited Partnerships (MLPs) have emerged from the recent economic turmoil as one of the strongest asset classes for midstream oil and gas investors, delivering a 42% total return on one industry index and outperforming the broader S&P by roughly 27%, according to a 2010 summary. A more recent report predicts that MLP transfers will continue to dominate the energy sector, as their higher valuations allow them to hunt for “less attractively valued pipeline assets that have yet to be dropped into that structure,” such as last week’s announcement of the $21 billion Kinder Morgan/El Paso deal.
Update your MLP valuation approaches. With the ongoing surge in MLP activity, valuation analysts will want to be current on applicable valuation methods. The two most commonly applied are the income approach (DCF and dividend distribution yield) and market approach (guideline public company and transaction method, focusing on multiples of TIC/EBITDA and Price/Distributable cash flows). However, each of these approaches takes on certain nuances when applied to MLPs, says Brad Edwards (Ernst & Young), who spoke at last month’s ASA-Houston Energy Valuation conference. Taxing considerations along with cost of capital, Capex, and working capital assumptions are critical, Edwards adds. Look for his article on “mastering” the art of MLP valuations in the December BVUpdate.
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