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Energy Transfer Partners LP (ETP), Linn Energy LLC (LINE): Will the Fed Ruin Your MLPs?

We were pleased that we received upgrades from the rating agencies during 2012 to BBB and Baa2, which is currently the highest rating level for any MLP. We are hopeful that the rating agencies will expand the MLP eligible ratings to include BBB+, Baa1 rating level. We believe our size; scale, diversification, and performance through various cycles as well as our strong credit metrics and discipline adherence to our financial growth strategy should make us a candidate for the inaugural BBB+, Baa1 class of MLPs.

Since that time, Enterprise Products Partners L.P. (NYSE:EPD) has indeed achieved a Baa1 rating, handed down from Moody’s Corporation (NYSE:MCO) this past March. It is perhaps the best positioned MLP for rising interest rates because it has no general partner, which means it pays no general partner stake and no incentive distribution rights, thereby lowering its cost of capital.

But wait!
There is an important caveat to all of this, and that is that the energy sector is absolutely on fire right now. The U.S. is producing more oil than it has since 1991 and more natural gas than it ever has in its 100-plus year history of producing the stuff. This production is completely dependent on midstream infrastructure, and therefore, it’s dangerous to assume that because MLPs have underperformed in periods of rising interest rates and inflation in the past, they will continue to do so going forward.

Bottom line
Investors have flocked to energy MLPs because of their high yields and lucrative distribution payouts. Some fear that as interest rates rise, investors will abandon MLPs and fall back in love with bonds. However, interest rates on bonds would have to climb pretty high to top many of the yields on these MLPs. Ultimately, the energy industry is firing on all cylinders, and it doesn’t make sense to abandon ship based on economic theories about what might happen when the underlying business at these MLPs is so strong. However, not all MLPs are created equal, and it makes sense to take the time to evaluate your holdings now, especially in regard to cost of capital.

The article Will the Fed Ruin Your MLPs? originally appeared on Fool.com is written by Aimee Duffy.

Fool contributor Aimee Duffy has no position in any stocks mentioned. If you have the energy, follow her on Twitter: @TMFDuffy.The Motley Fool recommends BreitBurn Energy Partners, Enterprise Products Partners, and Moody’s.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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