Once a market darling, master limited partnerships (MLPs) have simply fallen on hard times. Various market forces have conspired against the pass-through entities and have taken them down pretty hard over the last year or so.
On one hand, the collapse in crude oil and natural gas has hurt their bottom lines. More and more MLPs have moved beyond just transporting energy and have begun processing things like natural gas liquids (NGLs). That puts them right in the crosshairs of commodity prices.
At the same time, the wave of E&P bankruptcies has left many MLPs fighting for payment for their services.
And let’s not forget the Federal Reserve. As high-yielding assets, MLPS have been hit as the Fed has begun to ratchet-up interest rates.
All in all, that’s sent MLPs down a staggering 20% over the last year, as measured by the exchange-traded fund Alerian MLP ETF (AMLP).
But that dip has also made many top-notch, quality MLPs pretty big bargains when looking at price-to-distributable-cash-flows (P/DFC) metrics. For investors looking for high income potential, MLPs are simply the cheapest stocks out there.
Here are five super-cheap MLPs to buy today.
Super-Cheap MLPs to Buy: Sunoco LP (SUN)
When it comes to MLPs, some of the cheapest options aren’t on the beaten path. A prime example of that is Sunoco LP (SUN).
SUN is part of mega-MLP Energy Transfer Equity LP’s (ETE) huge umbrella of companies and was created as the result of a buyout and tuck-in addition.
SUN’s main business is to distribute gasoline to convenience stores, independent dealers, commercial customers and distributors. It does this through its huge network of storage facilities, terminals and a mega-sized trucking fleet. The firm also owns and operates around 1,340 convenience stores under the Sunoco, Stripes and A-Plus brands.
It’s a pretty boring business that leads to steady results for its investors. Since 2011, SUN has managed to growth its earnings by an annual growth rate of 133%. Part of that has been organic growth, but part has been the smart use of drops-downs from its parent, ETE.
And those drop-downs continue today. More recently, SUN has agreed to buy the fuel distribution businesses from struggling Emerge Energy Services LP (EMES) for a song. The deal should be immediately accretive to Sunoco with respect to distributable cash flow. That means that SUN’s 10.5% yield is going to grow.
Meanwhile, investors can buy the MLP’s yield for next to nothing.
Super-Cheap MLPs to Buy: Enbridge Energy Partners, L.P. (EEP)
Enbridge Inc (USA) (ENB) is one of North America’s largest pipeline and midstream owners. So naturally, its MLP would be one of the strongest as well.
Enbridge Energy Partners LP (EEP) features a host of oil-related pipelines and storage assets.
The problem for EEP is that volumes in its pipelines have begun to weaken has many of its clients have struggled in the wake of low crude oil prices. That’s sent shares of EEP in the basement and pushed its yield up to a staggering 10.9%.
But here’s the thing, infrastructure is an irreplaceable asset. When an oil company files for bankruptcy, the oil still flows from its wells. As these assets get taken over — often for a song — they will still need to use EEP’s pipelines. That fact has been manifested in the MLPs last quarter. Volumes have finally started to pick up again.
Ultimately, that will help strengthen EEP’s bottom line and cash flows once again — cash flows that can be bought for a P/DCF of less than 10.
Super-Cheap MLPs to Buy: NuStar Energy L.P. (NS)
The markets continue to ignore NuStar Energy L.P.’s (NS) continued turnaround plans. But one investor’s loss is another investor’s gain, and in this case, NU is one of the cheapest bargains when it comes to MLPs.
Back in the day, NU was all about asphalt. Refiner Valero Energy Corporation (VLO) basically shoved a bunch of its “junk” into NS in order to free itself from non-fuel-related business. That asphalt business turned out to be a huge albatross around the MLP’s neck, and investors basically left NuStar for dead.
But that was then and this is now.
NS has completely removed itself from asphalt refining; pumped itself full of fee-based pipelines, storage and terminaling assets; and has continued to execute on its turnaround plans. It has been so strong in its turnaround that NU has actually improved its coverage ratio to pay for more than its dividend payment. That’s something that hasn’t been the case historically for the firm thanks to that asphalt business.
And yet, the market doesn’t care. NS still trades for a cheap 11.71 P/DCF and yields nearly 9%.
With that said, NS could be one of the best sleeper bargains when to MLPs. Investors shouldn’t let this one pass them by.
Super-Cheap MLPs to Buy: Tesoro Logistics LP (TLLP)
It’s kind of a proven fact, but MLPs with strong parents, do better than others. When your parent is one of the largest refiners in the country — Tesoro Corporation (TSO) — you’re pretty much guaranteed to win.
That’s been the case for Tesoro Logistics LP (TLLP).
TSO dropped down all its pipeline assets into the MLP when it was IPO’d. As a result, TLLP’s bread-n-butter business is transporting and storing crude oil for Tesoro’s refiners. Both in and out. It’s a stable and guaranteed source of revenues for the MLP.
That base — built on long-term contracts — has helped the MLP be a huge performer since it was launched. However, TLLP hasn’t rested on its laurels. The firm has added a host of other assets, including more oil products and natural gas pipelines, storage tank farms and terminal/trucking assets.
Those additions have helped grow its distributable cash flows by over $296 million between 2013 and 2015.
And yet the broader MLP selloff has TLLP trading at relatively cheap 15 times cash flows and with a big 6.6% dividend yield. Ultimately, Tesoro is cheap considering its growth potential.
Super-Cheap MLPs to Buy: Spectra Energy Partners, LP (SEP)
Spectra Energy Partners, LP‘s (SEP) P/DCF of around 18 is a tad bit higher than the rest of the MLPs on this list. But when you consider other monster MLPs — such as Phillips 66 Partners LP (PSXP) — are trading for nearly 30 P/DCF metrics, it starts to look a lot better.
And there is a reason for SEP’s slightly higher price. The firm is one of the largest owners of natural gas pipelines heading towards the Northeast and Gulf Coast. Those intrastate lines move tons of natural gas for utilities — both as gas and for power generation — as well as chemical manufacturers in the Gulf. That huge system features plenty of stable operating cash flows.
But the firm has growth as well. It has added crude oil and natural gas liquids capacity in recent years and has roughly $6 billion in projects in construction. Those projects are of the demand-pull kind, meaning end users — like refineries and utilities — will keep the flow of gas/oil constant.
So considering that SEP has had a long history of dividend growth, a current yield of 5.6% and the ability to grow that yield further when its impressive backlog gets into service, that 18 P/DCF doesn’t seem so expensive at all.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.