What’s not to like about master limited partnerships (MLPs)? The asset class has surged in popularity as investors of all stripes have been drawn to their high tax-deferred distributions. Those dividends, plus capital appreciation of the units, have made MLPs one of the best-performing asset classes over the last decade.
The problem is that the cat is out of the bag. With so much attention being drawn to the sector, MLPs (as a whole) aren’t the screaming bargains they once were. So, how do you know if you are actually scoring a bargain deal?
The price-to-distributable-cash-flow (P/DCF) metric, of course.
As pass-through entities, traditional stock metrics such as price-to-earnings don’t work for MLPs. That’s because MLPs carry a ton of depreciation expenses on their balance sheets. That kills earnings, but not cash flows. An MLP can actually lose money, yet still throw off a ton of cash. And, when it comes to cash flows, that’s the only real thing that matters in the MLP world.
Morgan Stanley estimates that the historical average P/DCF for MLPs is about 13, with a standard deviation of plus or minus 2.
With that metric in mind, here are three MLPs that can still be considered bargains.
3 Bargain MLPs to Buy Right Now: Sunoco Logistics Partners L.P.
P/DCF: 12.17
Things haven’t been so rosy for Sunoco Logistics Partners L.P. (SXL). It’s been underperforming many of its peers, but that hasn’t been due to structural problems or any major issues at SXL. The MLP is humming right along, but investors have been favoring higher-growth MLPs churning out newer pipelines and engaging in M&A. This could help explain why SXL trades at a price-to-P/DCF of just 12.
But, at that price, many investors are discounting much of SXL’s potential.
SXL’s assets are strategically located in some of the hottest and still-pumping shale formations in the country. Secondly, Sunoco recently added about $4 billion in new CAPEX projects to its arsenal this year. While those pipeline may not be as exciting as other MLP’s recent announcements, they’ll continue to help SXL churn out cash flows for its investors.
Its distributions this year are expected to climb by over 18%. Finally, those robust cash flows allow SXL to fund future M&A deals without having to break the bank.
In the meantime, investors in the MLP are treated to a 4.5% distribution yield.
3 Bargain MLPs To Buy Right Now: NuStar Energy L.P.
P/DCF: 10.65
For investors in midstream player NuStar Energy L.P. (NS), it’s been a long and bumpy road. Since separating from top-notch refiner Valero (VLO) before the recession, NS has been losing money. The culprit has been various impairment charges at its asphalt refining facilities and crude oil storage terminals. That has made life difficult at the MLP.
This helps explain why NS is trading for a dirt-cheap P/DCF of just under 11, with a 7.5% yield.
But, the struggling MLP seems to have finally gotten its mojo back. NuStar has undergone a series of moves to strengthen its asset base and reduce debt. That process has included moving more crude oil and natural gas in the Eagle Ford, as well as reducing its exposure to margin-based business such as asphalt refining. Now, it’s all about steady fee income at NuStar.
Those moves seem to be working. This past quarter was one of NuStar’s best ever, and the important thing for income seekers was that NS saw cash flows that actually provided 1.25x its dividend coverage. That’s a huge win for the struggling firms.
This also could signal that its bargain share price and high yield may not stick around for much longer. Investors may want to take a stab at the former struggling MLP before it’s too late.
3 Bargain MLPs To Buy Right Now: Enbridge Energy Partners, L.P.
P/DCF: 13.71
While TransCanada (TRP) has struggled with its public battle over the Keystone XL pipeline, cross-town rival Enbridge Energy Partners, L.P. (EEP) has continued to rack up some impressive wins. Yet, investors seem indifferent.
EEP trades for a P/DCF of only 13.7, making it a huge bargain in the MLP world.
That’s because EEP’s parent, Enbridge (ENB), has gotten serious about using its MLP in an effective manner. ENB is planning on spending a whopping $44 billion on new pipeline projects over the next few years, and it has already signaled that it plans on dropping them down into EEP as time goes on.
That process has already begun, as last year ENB moved $900 million worth of assets into the MLP. Those drop-downs are the secret to making money in MLPs and will help EEP continue to grow its cash flows over time.
But, investors in EEP don’t need to wait for this process to happen to score a major win. EEP’s diverse base of pipelines, processing and storage, and terminaling assets make for some quality earnings and cash flows, which already support its hefty 6.9% yield.
As of this writing, Aaron Levitt held no positions in any of the aforementioned securities.
