Equity Research
MLP Outlook 2009: Staying Defensive
• Positive, But Still Defensive. After declining 38.2% in 2008 (total return), we are
cautiously optimistic that master limited partnerships (MLP) have the potential to
generate attractive returns in 2009. While technical selling pressure from distressed
institutional investors and others is likely to dissipate in 2009, MLPs still face a
number of fundamental headwinds including challenging capital markets, low
commodity prices, and a recessionary economic environment. We would
concentrate portfolios on investment grade, fee-based MLPs with strong balance
sheets, and secure distributions.
• Top Picks. Given our outlook, our top Outperform-rated stocks are mostly feebased
pipeline MLPs with a bias toward general partners (GP). Highlighted GPs
offer the same stability in cash flow as the underlying MLPs, but are trading at
even more depressed valuations, with greater distribution growth potential. We also
recommend MLPs with relatively secure cash flows that are trading at significant
discounts to the pipeline MLP peer group. In these instances, the above-average
yields more than compensate investors for slightly higher risk and provide
attractive returns in and of themselves, even absent price appreciation. Picks
include CPNO ($13.72), EPE ($19.38), ETE ($17.00), GEL ($10.70), MGG
($16.01), NRGY ($20.45), PAA ($38.44), RGNC ($9.77), TPP ($23.35), and TOO
($13.23).
• We Introduced A New Commodity Price Deck. Consistent with changes made
by Wachovia’s E&P research team, we lowered our 2009 natural gas and crude oil
forecast to $5.75 per thousand cubic feet (Mcf) and $55 per barrel of oil (bbl),
respectively, from $7.50 per Mcf and $80 per bbl and lowered our long-term
forecast to $7 per Mcf and $70 per bbl from $7.50 per Mcf and $80 per bbl. We are
assuming a 55% natural gas liquid (NGL)-to-crude correlation in 2009, which
implies an average forecasted NGL price and processing margin of $0.72 per gallon
and $0.23 per gallon in 2009, respectively.
• We Lowered Our Valuations. We lowered our valuations by an average of 6% to
reflect the following: (1) a lower commodity price deck; (2) higher financing costs,
(3) lower gathering and pipeline volume, driven by a slowdown in drilling and
reduced (recession induced) demand; and (4) a more modest outlook for
distribution growth. Specifically, we have lowered valuations for pipeline,
gathering and processing (G&P), and upstream MLPs by 2%, 15%, and 9%,
respectively. Our revised valuations still suggest median sector total return
potential of 49% in 2009, consisting of a 13% yield, 4% distribution growth, and
32% valuation expansion. Even without any valuation expansion in 2009, MLPs
could still generate a median total return of 17%.
• Cautious On G&P And Upstream Subsectors Near Term. We are cautious near
term on G&P and upstream MLPs, as we expect Q4 2008 and Q1 2009 earnings to
be weak and commodity prices to remain volatile. Based on our revised 2009
forecasted price deck, (which reflects improvement from current levels), we are not
forecasting widespread distribution reductions in our models. However, some
MLPs may need to reduce distributions if current commodity price levels persist.
We would look to get more aggressive in these names if commodity prices stabilize
and/or in the wake of any distribution reductions announcements.

Positive But Still Defensive
After declining 38.2% in 2008 (total return), we are cautiously optimistic that MLPs have the potential to
generate attractive returns in 2009. While technical selling pressure from distressed institutional investors and
others is likely to dissipate in 2009, MLPs still face a number of fundamental headwinds, in our view,
including the following:
(1) Difficult and more expensive access to capital;
(2) Low commodity prices; and
(3) A recessionary economic environment.
While credit markets could improve in the next quarter or two, commodity prices could rebound faster than
anticipated, and the worldwide coordinated efforts to revive the economy could prove successful, the timing
of these factors is difficult to predict. Thus, we prefer to take a conservative stance and assume that
fundamentals do not improve materially in 2009.
Wachovia’s economics team is forecasting the U. S. recession to end by Q3 2009, with positive gross
domestic product (GDP) growth of 1.0% for the quarter. Further, Wachovia’s high yield (debt) energy
research analyst expects high yield markets to improve in H2 2009.
Given our conservative stance, we prefer to remain defensive and focus on MLPs that are best equipped to
withstand a difficult environment. We would concentrate portfolios on investment grade, fee-based MLPs
that have strong balance sheets and secure distributions. This group (i.e., large-cap pipeline MLPs) is
currently yielding 9.5%, with forecasted 2009 distribution growth of 4.4%. Thus, while yields are lower (the
MLP median is 12.8%), we view risk/reward as most compelling. And, we believe the total return potential of
36% for large-cap pipeline MLPs is objectively attractive. (Please see Figure 24 for a breakdown of our MLP
universe by fee versus commodity exposure and business lines.)
Top Picks
Given our outlook, our top Outperform-rated stocks are mostly fee-based pipeline MLPs. Specifically, we
have a bias toward publicly traded general partners. These stocks experienced greater declines in 2008 than
the overall sector (down 62.3%, versus declines of 38.2% for the Wachovia MLP Index and 37.0% for the
S&P 500 based on total return) likely due to their heavily concentrated institutional ownership base (68%
versus 52% for the MLPs overall). However, the highlighted general partners offer the same stability in cash
flow as the underlying pipeline MLPs, but are trading at even more depressed valuations, with greater
distribution growth potential.
We also sought MLPs with relatively secure cash flows that are trading at significant discounts to the pipeline
MLP peer group. In these instances, the above-average yields more than compensate investors for slightly
higher risk and provide attractive returns in and of themselves, even absent price appreciation. Our top
Outperform-rated picks include CPNO ($13.72), EPE ($19.38), ETE($17.00), GEL ($10.70), MGG ($16.01),
NRGY ($20.45), PAA ($38.44), RGNC ($9.77), TPP ($23.35), and TOO ($13.23).