When it comes to income investing, energy master limited partnerships (MLPs) pretty much have it all: a chance to participate in the domestic energy boom, which offers substantial growth, while earning great yields as well. What’s more, they also make a solid inflation hedge, since any spike in energy prices (or consumer prices in general) will send money rotating into energy all day long.
And perhaps best of all, the income is tax-advantaged — as an MLP investor, you avoid paying taxes on the majority of your holding for as long as you own it.
So it’s easy to see why this is a go-to asset class for long-term buy-and-hold.
One of my favorite MLPs is BreitBurn Energy Partners LP (BBEP), a 9.4% yielder that pays monthly distributions. BreitBurn Energy is a privately held company that spun off a portion of its assets to create BBEP as a way to realize more value. BreitBurn then occasionally drops in new assets, which continues to feed the reserve life and grow the business well into the future. This setup makes BBEP an outstanding fit for those seeking high yield and strong fundamentals … and I expect the company to continue to kick out very strong income going forward.
BBEP has also made some rather bold moves recently in terms of acquisitions. In July, BreitBurn Energy Partners LP announced the acquisition of QR Energy Partners LP (QRE) in a one-for-one unit exchange with a value of $3 billion. BBEP was already one of the largest upstream oil and gas MLPs, and this deal will push it firmly into No. 1 territory, allowing it to control 57,300 barrels of daily production and giving it a total value of around $7.8 billion.
The key factor in selecting an energy MLP is its “distributable cash flow,” since that determines the payout — and there’s good news on that front in this QRE acquisition, too. BreitBurn expects the deal to be accretive to its per-unit distributable cash flow, and is planning to increase the distribution accordingly. BBEP’s current annual payout is $2.01 per unit, and BreitBurn intends to boost that to $2.08, which implies a whopping 9.7% forward yield at current prices.
Following the announcement of this definitive $3 billion merger, shares of both BBEP and QRE have pulled back with the rest of the energy MLP sector as the price of oil has traded lower. The merger is getting a lot of acclaim by the analyst community, citing accretive properties to the combined entity that shores up long-life reserves and free cash flow for future distributions.
This current dip in oil prices is just an opportunity to pick up great MLPs like BBEP at an attractive entry point.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.