by Aaron Levitt | August 8, 2013 8:04 am
For investors, master limited partnerships (just MLPs for short) continue to pay the goods with weighty yields and capital appreciation. The midstream sector has benefited from rising natural gas and oil production and has been on fire the past few years.
Big money can be made in owning the critical infrastructure required to bring energy from wellheads to end users as strong stable cash flows and high tax-deferred distributions await investors who take the MLP plunge.
Given this asset class’s propensity to throw off those big distributions in good times and bad, it’s no wonder why pipelines are popping up in more portfolios.
However, as the sector has caught the attention of John Q. Public, top MLPs — such as MPLX, LP (KMP) and Phillips 66 Partners, LP (PSXP) — are now yielding far less than the sector’s historical norm. In this case, only around 4%. While that’s all well and good — MLPs don’t have to have enormous yields to be good investments — sometimes you just want/need a fat dividend to pay the bills.
Luckily, there’s plenty of midstream, pipeline and other firms structured as master limited partnerships that are paying fat yields in excess of 6%.
Here’s some of the top choices.
Yield (as of 8/8): 6%
While natural gas usage in the United States has been a tear during the past few years, that growth is a drop in the bucket when compared to our neighbors to the south. Since 2008, Mexican imports of U.S. gas have improved north of 90%, reaching a total of 767 billion cubic feet last year. What’s more, they’re poised to grow even further.
Benefiting from this could be El Paso Pipeline Partners, LP (EPB).
While the pipeline firm owns a plethora of natural gas focused assets, the firm’s newly commissioned Sierrita Lateral Line expansion could be a huge money maker long term. The project will send approximately 200 million cubic feet per day over the U.S.-Mexico border to newly built electric utilities in the South American nation. The company also has begun “open season” process for capacity upgrades on its 30-inch Mier-Monterrey Pipeline, which also sends natural gas across the border.
It’s not the only pipeline play into the nation, but with a 6% dividend and Kinder Morgan Inc.’s (KMI) backing, it’s one of the best.
Yield (as of 8/8): 6.5%
To put it mildly, Global Partners, LP (GLP) is an energy logistics and marketing powerhouse. Unlike most midstream firms, GLP doesn’t actually own pipelines, but its reach covers the full range of petroleum products — including heating oil, propane, natural gas and oil — through one of the largest terminal and storage networks in the country.
But its Bakken crude-by-rail operations could be the most interesting.
As we’ve noted, refiners on both coasts have been salivating at the bounty of oil produced in the region and have increasingly turned to rail travel as a way to gain access. GLP is one of the largest operators of terminals in the Bakken and has been increasing its capacity for storage and shipment. That included buying a bankrupt ethanol facility in Oregon near Californian refineries. Global is using the facilities massive storage tanks to hold excess Bakken crude.
Global Partners also has rewarded its shareholders with a 10% increase in its distribution so far this year. GLP currently yields 6.5%.
Yield (as of 8/8): 6.6%
Regency Energy Partners, LP (RGP) — which offers a full suite of midstream services to producers in several of the most prolific shale formations in the U.S., including the Haynesville, Eagle Ford, Barnett, Fayetteville and Marcellus — could be a great pick to play the hydraulic fracturing boom.
Aside from its current stable of gathering and processing assets, Regency has been busy adding new midstream facilities to its portfolio. Its latest acquisition — a $1.3 billion purchase of Southern Union Gathering’s 5,600-mile gathering system and 500 million cubic feet per day of natural gas processing facilities from Energy Transfer Equity (ETE) and Energy Transfer Partners, LP (ETP) — will significantly expand RGP’s presence in the Permian Basin.
More importantly, that deal has been pretty accretive for unitholders.
Focusing on the natural gas and natural gas liquids (NGLs) side of the energy business, RGP has been able to strongly grow its cash flows. Net operating cash flow increased almost 20% year-over-year to $67 million. That allowed Regency to up its dividend, with the August payout coming in a penny higher at 47 cents — good for a current 6.6% yield.
Yield (as of 8/8): 7.6%
The bulk of MLPs lie within the pipeline and midstream sector. However, there are plenty of other firms that have taken on the corporate tax structure.
One of the best is fertilizer play Terra Nitrogen Company, LP (TNH).
Terra owns just a single asset — a nitrogen manufacturing facility in Verdigris, Okla. However, that one factory manages to produce 1.9 million tons of urea ammonium nitrate solutions (UAN) and 1.1 million tons of ammonia annually. These are basic ingredients for most nitrogen fertilizers as well as many industrial products.
They also happen to be made from cheap, abundant U.S. natural gas.
That has allowed TNH to realize some of the lowest feedstock costs versus many of its international peers, and the firm has been able to enjoy juicy crack spreads on its “refining.” Those juicy margins have trickled down to shareholders in the way of capital appreciation and strong unit distributions. Terra Nitrogen currently yields a hefty 7.6%.
Yield (as of 8/8): 10%
Formerly a subsidiary of refiner Valero (VLO), independent NuStar Energy, LP (NS) has finally regained its mojo. After flat lining its distribution growth, the MLP has undergone a series of moves to strengthen its asset base and reduce debt.
That’s include focusing on move crude oil and natural gas in the Eagle Ford as well as reducing its exposure to “margin”-based business like asphalt refining. This refocused strategy seems to be working as the NuStar recently trounced earnings and reported that second quarter distributable cash flow was a hefty 71 cents per unit, compared to 45 cents in the year-ago period.
With NU planning on moving an additionally 25,000 barrels per day in the Eagle Ford this year, the firm’s 10% dividend seems well-covered.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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