For master limited partnerships (MLPs), the last few years haven’t been so great. After being the income asset class du jour, MLPs have taken it on the chin hard since the beginning of the oil rout.
In 2014, the sector only managed to return 6% — well below its historical long-term averages. Last year, MLPs lost an incredible 32% when looking at the benchmark Alerian MLP index.
So far, this year has been another round of losses, as MLPs have tanked roughly 3% more. Investors continue to flee as lower energy prices have crushed many of the E&P names in the energy patch. After all, MLPs won’t make any money when there’s no one using their pipelines or gathering facilities.
However, not all MLPs deserve the harsh treatment from investors. In fact, the drop has made several of them into screaming bargains.
Much of the original appeal of investing in MLPs — high, growing dividends, secured by volumes of product — is still there for more than a few of them. The oil price rout hasn’t changed anything. The trick is, investors need to find them. A rising tide isn’t lifting all boats anymore.
Here are three MLPs that are screaming bargains for investors today.
MLPs That Look Like Screaming Bargains: TC Pipelines, LP (TCP)
Dividend Yield: 7%
Pipeline firm TransCanada Corporation (USA) (TRP) has been in the news for all the wrong reasons the last few years. Much of that bad press comes from its much-maligned and failed Keystone XL project. Because of that, its MLP — TC Pipelines, LP (TCP) — has been pretty much ignored by investors.
That’ a real shame, as TCP could be one of the best bargains when it comes to MLPs.
TCP’s main assets include seven critical, FERC-regulated pipelines that move roughly 15% of America’s daily natural gas demand.
Those boring and heavily regulated pipelines churn out incredibly steady cash flows. TCP has managed to grow its dividends fairly regularly since its IPO in 1999. That includes a 6% year-over-year jump with the last payout.
But even more growth could be coming TCP’s way. TransCanada may finally be making the news for the right reasons.
TRP has offered to buy Columbia Pipeline Group Inc (CPGX) — one of the largest movers of natural gas in the Northeast. CPGX includes plenty of FERC-regulated pipelines operated through its MLP Columbia Pipeline Partners LP (CPPL). The speculation is that CPPL will be merged into TCP. That’s great news for TCP’s cash flows and future dividend growth.
MLPs That Look Like Screaming Bargains: NuStar Energy L.P. (NS)
Dividend Yield: 10.1%
For investors in NuStar Energy L.P. (NS), it has been a tough battle. The firm was separated from mega-refiner Valero Energy LP (VLO) just before the recession and was a money loser thanks to its heavy reliance on asphalt refining and other margin-based business.
That began to change as NS shed ownership of asphalt and in turn focused on terminaling, bunkering and moving of crude oil and refined products. Today, NuStar owns roughly 8,659 miles worth of pipelines and 79 terminal/storage facilities — all under traditional “toll-road” styled contracts MLPs are known for.
This has helped NS become a money maker. The firm is finally covering its hefty 10.13% distribution by more than enough and won’t have to rely on spending its cash balance to keep it going. Meanwhile, net income has also turned positive as the firm’s new focus on moving/storing energy products is a much more reliable business.
The problem for NS is that all of this has happened while master limited partnerships have fallen out of favor. Shares of NuStar have fallen 27% over the last 52 weeks. For investors, that’s a huge gift. This isn’t the old NS, but one that has its act together.
All in all, NuStar could be one of the MLPs to buy today.
MLPs That Look Like Screaming Bargains: Magellan Midstream Partners, L.P. (MMP)
Dividend Yield: 4.8%
The 15% drop in Magellan Midstream Partners, L.P. (MMP) units over the last 52 weeks is a gift for long-term investors. That’s because over this time, MMP has managed to report record annual distributable cash flow generation.
The key has been MMP’s never-wavering focus. Magellan simply moves and stores crude oil and gasoline.
I should rephrase that. MMP simply moves and stores a lot of crude oil and gasoline. Magellan’s 11,100 miles worth of pipelines and storage facilitates makes up the largest refined petroleum products pipeline system in the country. Nearly 50% of the nation’s total refining capacity — either going in or coming out — can tap into one of MMP’s lines, terminals or storage farms.
That dominant position as the biggest refined products player continues to beef up MMP’s bottom line.
Also helping has been the firm’s focus on organic projects. The firm has been smart in adding fee-based additions to its pipeline empire. Several of those pipelines came into service in 2015, and the firm continues make smart moves in adding new capacity. All of this adds up to rising cash flows for investors — cash flows that are pretty much immune from commodity prices.
And yet, the market has thrown one of the best MLPs away. Investors should be buying this one with both hands.
As of this writing, Aaron Levitt was very long MMP.