It’s no secret that the energy sector is hurting right now. Lower oil prices have crimped drilling activity, profits and share prices.
But if you look at initial public offering (IPO) activity in midstream sector, you’d never know it. Investors continue to flock to midstream and other natural resource firms structured as master limited partnerships (MLPs).
Last year, 11 new MLPs went public and raised a whopping $5.1 billion dollars in proceeds. So far, 2015 has been another banner year.
And there are plenty of reasons for investors to be bullish on MLPs. There’s big money to be made in owning the critical infrastructure required to bring energy from wellheads to end users. And even more can be made if all those pipelines, storage tanks and gathering systems are placed in an MLP.
The tax structure of MLPs provides huge benefits for individual investors and the sponsoring firms alike, including high tax-deferred distributions.
But not all new MLPs are worth your time or investment. Here are 3 that could be big winners for your portfolio.
New MLPs To Buy Today — EQT GP Holdings LP
Many mid- and large-sized producers of crude oil & natural gas have been spinning off whatever midstream assets they have into MLPs to raise cash and take advantage of the tax savings. These pipelines and gathering systems often are only used by the sponsoring firm and have cash flows that run like clockwork.
Marcellus shale fracker EQT Corporation (EQT) did just that when it created new MLP EQT Midstream (EQM).
And as good as EQM has been for investors, EQT isn’t done yet. The firm recently had an IPO for EQT GP Holdings LP (NYSE:EQGP) — which represents the general partner assets of EQM.
See, there are two parts to a MLP — the limited partner (LP) and the general partner (GP). The LP is just a holding vehicle for the infrastructure assets. The general partner is really the one running the show. As such, GPs are entitled to receive fees and extra bonuses for managing the MLP — called incentive distribution rights (IDRs).
Those extra cash bonuses means that GPs will feature faster dividend growth than their LP twins, which could explain why EQGP was oversubscribed when it went public.
While it is very brand new and features no yield information just yet, EQGP should be able to grow its payout at a much faster rate than EQM. The headline won’t be as large, but the overall total return should have EQGP outperforming its LP.
New MLPs To Buy Today — Tallgrass Energy GP LP
Given just how great owning GPs can be for investors, many midstream firms are following a similar playbook to EQGP.
Tallgrass Energy Partners LP (TEP) owns several pieces of critical pipeline infrastructure in the Rocky Mountains and Midwest of the United States, including several high-use pipelines leading into the oil hub of Cushing, Oklahoma. All of these pipelines feature strong volumes and cash flows, which have benefited TEP’s distribution growth and shareholders.
In order to raise cash for expansion projects and acquisitions, TEP decided to spin out some of its general partner rights as new MLP Tallgrass Energy General Partner Limited (NYSE:TEGP).
Tallgrass Energy General Partner Limited owns a controlling stake in the membership interests in Tallgrass Energy LP’s general partner, Tallgrass Equity (a private firm). Tallgrass Equity owns all the IDRs and 1.37% of the general partner interest in Tallgrass Energy General Partner Limited. After the IPO, TEGP will also own an additional 33% of Tallgrass Energy LP shares.
The new MLP will basically control TEP and get a larger share of the cash flows at the pipeline firm. That’s why Tallgrass is willing to go through all the complication — selling a stake in the general partner is a relatively painless way to raise even more cash.
Those hefty cash flows highlight exactly why TEGP has been the largest American IPO of any sector so far this year.
New MLPs To Buy Today — Columbia Pipeline Partners LP
Natural gas utilities are also getting into the MLP game. One of the biggest IPOs of the year belongs to sleepy and boring natural gas utility NiSource (NI).
As one of the largest natural gas utilities, NI has a huge amount of natural gas transmission infrastructure — much of which is being placed inside a new stand-alone company called Columbia Pipeline Group (CPG). At the end of the day, CPG will hold about 15,000 miles’ worth of natural gas pipelines, the largest natural gas storage facilities as well as other energy-related assets.
The beauty is that they are all going to be dropped down into new MLP Columbia Pipeline Partners LP (CPPL).
CPPL will benefit directly from these drop-downs as well as the $8 billion in expansion projects that CPG has already greenlit. Based on these assumptions, CPPL expects that it will be able to grow its dividend at an average annual rate of approximately 20% through 2020. Based on its targeted full-year pay-out of 67 cents, CPPL should have an initial yield of 2.5% this year.
For the longer term, that massive dividend growth rate makes CPPL one of the best new MLPs to buy today.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
