July 29, 2002; McDep Technique Justifies Strong Sells


We acknowledge that we have used some strong language in justifying our Strong Sell recommendations.  Our words are intended to convey conviction, but not any personal animosity or lack of objectivity.  Actually our language seems quite mild in comparison to the reality of seeing executives taken away to jail in handcuffs.  Our case rests on the numbers.  The McDep technique has worked powerfully for us and it points to high vulnerability to stock price decline in energy infrastructure partnerships. 


Investors in the partnerships might wonder how something that pays a good income can decline to a much lower price.  Those “steady” income payments can disappear overnight as they did for the common stockholders in sponsors, Williams and Dynegy.  But the partnerships are not the same as the sponsor as the management of El Paso Energy Partners doth protest.  Whatever, the management is the same. 


The reality is that the typical limited partner is getting a front-end loaded payment that depends on new financing to be sustained.  Moreover downside protection goes to the lenders and the upside reward goes to the general partner.  That leaves very little left to give the limited partner any lasting return.


It also helps to have a budding scandal to speed a stock in its decline.  Compensation of general partners is a story of 1990s greed that is yet to be told.  Consider the complacency of investors who put more than a hundred million dollars into the recent initial public offering of Pacific Energy Partners (PCX).  The sponsor is the chairman of Quest Communications, a company that appears to have defrauded investors, including telephone company employees and retirees, of a mere $70 billion or so, and is now under criminal investigation.

July 29, 2002; Meter Reader: Move Up to Quality