In the ongoing hunt for yield, the class of securities known as oil pipeline master limited partnerships (MLPs) came out of obscurity.
There are now more than 100 MLPs to pick from, although not all are related to oil. The advantage of MLPs is that they operate in an industry that delivers something people need on a constant basis: energy. Thus, revenues and cash flow are relatively predictable. Most of that cash flow is thrown off as a distribution to shareholders.
There are risks, in that entities that aren’t geographically diversified can become constricted by local regulators not permitting enough of an increase in local energy rates.
So, which stocks are worth your investment? Kinder Morgan (KMP) is considered the gold standard of the industry, but there are other attractive plays to be aware of. Here are three pipeline MLPs to check out:
Energy Transfer Partners (ETP)
Energy Transfer Partners (ETP) owns and operates a massive network of some 35,000 miles of pipeline that services both oil and natural gas. It has the benefit of being geographically diversified, and it has seven different operating segments that further diversify its revenue streams.
ETP transports and stores natural gas on both interstate and intrastate bases. The company has a midstream operation, collecting and processing natural gas before sending it on its way. ETP stock is divesting itself of its retail marketing operation — the Sunoco gas stations it operates in 24 states — as management seems to be more interested in stretching its natural gas reach into Mexico.
ETP stock’s segment adjusted EBITDA (cash flow from all its operating segments) is on the rise, from $3.2 billion in Q1 of last year to $4.2 billion this year. This appears to be just over the threshold of what it pays in dividends: $3.74 per share, or 6.7%.
Plains All American Pipeline (PAA)
Like ETP, Plains All American Pipeline (PAA) is also geographically diversified. Through PAA stock’s 17,000 miles of pipe, it transports crude oil and natural gas throughout Texas, Montana, North Dakota, Utah, Colorado, Oklahoma, the Rocky Mountains, the Gulf Coast and into Canada. Besides the pipelines, it has room for 74 million barrels of oil and 97 billion cubic feet of natural gas, and processes that natural gas in PAA stock’s 11 plants.
PAA happens to have an incredibly strong balance sheet. The company has about $500 million in long-term investments and $6.8 billion in debt, along with another $2 billion on its credit facility. PAA stock is also a big player in liquid natural gas, and has infrastructure other MLPs lack. Thus, as liquid natural gas penetrates the market more, PAA should see more benefit. Its sustainable distribution comes in at $2.52 per share, or 4.5%
Marlin Midstream Partners (FISH)
A relative newcomer to the space is Marlin Midstream Partners (FISH), which specializes in natural gas midstream logistics and liquid natural gas asset.
Now, FISH stock’s facilities are not diversified, in that there are only a few facilities, and are located in Texas, Utah and Wyoming. FISH stock has a slight advantage from an acquisition perspective, in that it is small enough to scoop up small high-yield operations that the big boys aren’t interested in.
Marlin has almost no debt (a mere $4 million). The thing that I like about a small niche player in this space is that it has room to grow, and can do so prudently while increasing cash flow. It isn’t a Titanic like Kinder Morgan or its peers; those stocks have decent long-term capital gain upsides, but Marlin is the type of the company that could become a long-term multibagger. FISH stock now pays a dividend of $1.42 per share or 7.4%.
Be careful, though, FISH stock is thinly traded. Even minor news can send the stock soaring or crashing. Be sure to use stop-losses and limit orders to reduce your risk.
So, if you’re looking for solid long-term stocks with high yield, you’ll have a tough time finding something better than these MLPs.
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As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.