To say that things have been tough for master limited partnerships (MLPs) over the last few months would be an understatement. MLPs have been downright obliterated. The combination of dropping energy prices, rising interest rates and global economic fears have had many investors running for the exits.
For many investors, MLPs have become too risky.
With that in mind, the broad MLPs sector proxy — the Alerian MLP ETF (AMLP) is down about 20% year-to-date.
Some of that drop in the Alerian index is justified. There are plenty of MLPs in some pretty dire straits. Several are facing high debt burdens and an inability to tap more funds to further drive growth. Cash flows for others have begun to dry up as lower commodity prices have hurt margins at several business. Others face specific client risk as E&P firms face the worst oil rout in decades.
And yet, for all the doom and gloom, there are plenty of MLPs that are kicking butt by still having rising earnings, cash flows and dividends.
For investors, these “baby with the bathwater” MLPs could be some of the biggest gifts in the market today. Here’s three MLPs that fit that description.
“Baby With The Bathwater” MLPs: Spectra Energy Partners, LP (SEP)
Dividend Yield: 5.8%
When it comes MLPs that are having no trouble surviving in this downturn, the key is to look at their sponsoring relationships. One of the best could be Spectra Energy Partners, LP (SEP).
SEP and its general partner — Spectra Energy Corp. (SE) — were spun out of megautility Duke Energy Corp. (DUK) back in 2007-ish. This relationship is what it is all about in the world of MLPs. Duke handles the utility side of things, while SE and SEP move all the energy to DUK’s power plants and natural gas customers. This connection to one of the biggest utilities in the country provides plenty of stable cash flows for SEP.
Especially when you consider that SE chucked all its midstream assets — around 17,000 miles worth of natural gas pipelines — into SEP. Again, the key for this MLPs is that the bulk of these pipelines are tied to fee-based contracts. Cash flows for all of 2015 were around $1.21 billion — up $150 million from 2014’s numbers.
As for growth, SEP has continued to expand via various growth projects. The firm has about $8 billion in backlog for new projects … projects that will be fee-based and “go to where the lights are” — i.e. cities and towns in the Northeast for electricity generation.
As those projects turn on, SEP should have no problem raising its dividend even further.
“Baby With The Bathwater” MLPs: CONE Midstream Partners LP (CNNX)
Dividend Yield: 11.9%
Some “baby with the bathwater” MLPs just happen to be in the wrong place and the wrong time. A perfect example could be CONE Midstream Partners LP (CNNX).
CNNX was formed via a joint 50/50 venture with CONSOL Energy Inc. (CNX) and Noble Energy, Inc. (NBL) to hold the pairing’s midstream assets in the Marcellus and Utica shales. The duo plopped assets covering around 496,000 acres in the core of the Marcellus into CNNX. That includes plenty of gathering lines, compression and dehydration facilities as well as condensate gathering and stabilization facilities.
The problem is that CNNX was formed just as energy prices were peaking.
As both NBL and CNX have suffered, investors have abandoned CNNX in the same fashion. CONE is down about 58% over the last 52 weeks.
However, that drop may not be 100% justified. For starters, the vast bulk of its operations are gathering lines — meaning they are fee-based and hooked up to already drilled and producing wells. The gas is already flowing through the pipes. There is no commodity risk here.
In fact, it’s just the opposite. CNNX has continuously seen increasing volumes and cash flows throughout its Anchor system since launching. Those cash flows have flowed back to investors as well, as rising dividends. Considering that CNNX has an enviable cash distribution coverage of 1.59x, investors may want to snag this MLP before the market catches on.
“Baby With The Bathwater” MLPs: EQT Midstream Partners LP (EQM)
Dividend Yield: 4%
While a 14% drop over the last 52 weeks isn’t as bad as some MLPs, it’s still enough to make EQT Midstream Partners LP (EQM) a decent value in the sector.
When shale driller EQT Corporation (EQT) first arrived in the Marcellus, there was nothing there. So EQT had to build out much of its needed infrastructure to gather and process the natural gas it produces. It later spun those assets out as EQM.
Today, EQT owns and operates nearly 700 miles of interstate pipelines as well as a total of 1,600-plus miles worth of gathering lines. The beauty is that the bulk of these pipelines and gathering systems are used almost exclusively by EQT’s operations (around 69% of its total revenue) and have cash flows that run like clockwork. Like CNNX, these are wells that are already producing gas.
As for growth, EQM’s interstate pipelines — like previously mentioned Spectra’s — flow directly into the Northeast and are primarily used by utilities generating electricity. These assets continue to be in demand and feature long-lived purchased agreements. For example, EQM’s latest deal with utility Consolidated Edison, Inc. (ED) is for 20 years. All in all, that helps strengthen EQM’s cash flows and ultimately, its dividends and long-term coverage ratio.
For investors, EQM represents one of the best “baby with the bathwater” MLPs to buy today.
As of this writing, Aaron Levitt is long CNNX and EQT GP Holdings, LP (EQGP), which is the publicly traded general partner of EQM.