A funny thing is happening. Investors are finally realizing that lower oil prices tend not to have any real effects on midstream master limited partnerships (MLPs).
Sure, some MLPs have exposure to commodities. But for the most part, the vast bulk of the pipeline player’s revenues and cash flows are tied to good old fashioned “take or pay” contracts tied to volumes. And as for those volumes, they continue to hold steady, as many of the problem energy producers have already disappeared.
As a result, investors are flocking to MLPs in spades.
Since bottoming out in February, the sector benchmark — the Alerian MLP Index — is up more than 50%. That torrid performance has continued, even as oil prices have floundered and dropped in recent weeks.
The truth is, MLPs offer high dividend yields backed by consistent cash flows. Those cash flows and dividends have continued to prove their worth in our low-interest-rate environment. And they’ll continue to prove their mettle in the years ahead.
While MLPs aren’t exactly screaming buys like they were at the beginning of the year, there are still plenty of top-notch midstream firms that could find a place in your portfolio. Here are three of the best MLPs to buy today.
Best MLPs To Buy: Western Gas Partners, LP (WES)
Distribution Yield: 6.6%
Western Gas Partners, LP (NYSE:WES) may not be one of the most well-known of the MLPs out there, but it could be one of the best. That’s because of who it is affiliated with.
WES was formed by mega-independent energy producer Anadarko Petroleum Corporation (NYSE:APC) to hold its extensive network of midstream and pipeline infrastructure. Today, that’s more than 13,980 miles of pipeline and 4,204 million cubic feet per day worth of natural gas processing capacity covering major production regions like the Marcellus and Eagle Ford.
For the most part, these are wells that are already tapped and pumping out crude. There’s no production risk here. APC needs to get this oil or natural gas to market and it sends the supply through WES’s pipelines. It’s as simple as that.
The key is that the built-in relationship provides WES with steady and uninterrupted throughput in its pipelines
That steady throughput results in steady cash flows at the MLP.
But there is still growth to be had at WES. Western Gas continues to execute various drop-down transactions from Anadarko. Additionally, the midstream firm’s operating area is host to numerous other blue energy firms. Organic projects and expansions have many of these firms now using WES’s gathering systems and lines. This has resulted in continued boosts to WES’s bottom-line and cash flows.
It has also resulted in double-digit dividend growth every year since its founding in 2010.
Best MLPs To Buy: TransMontaigne Partners L.P. (TLP)
Distribution Yield: 6.2%
For investors truly looking to avoid commodity risk with their MLPs, TransMontaigne Partners L.P. (NYSE:TLP) could be a prime pick. It has zero exposure to commodity prices. That’s because TLP focuses solely on terminal assets.
Terminal assets and storage tank farms are a pretty boring piece of the midstream pie — even more boring than a pipeline. But it’s one of the most important steps. Terminaling is basically the last piece before crude oil, fertilizer, gasoline etc. is shipped to end users.
TLP owns vast storage farms near various waterways. Producers move their products to these places and store them until they are sold. TLP will then put them on a barge or truck, or send them through another pipeline. TransMontaigne collects a fee on the storage and offloading.
It’s boring, but immensely profitable. During the first six months of 2016, TLP managed to report record levels of revenue, earnings and distributable cash flows. And that’s pretty much been the case for TransMontaigne throughout its history.
This continued strong performance has enabled TLP to have a rock-solid balance sheet and a distribution coverage ratio of 1.34x. With so much excess cash, TLP has had no trouble consistently raising its dividend in recent years. Today, TransMontaigne yields a healthy 6.2%.
Best MLPs To Buy: Shell Midstream Partners LP (SHLX)
Distribution Yield: 3.3%
When one of the largest integrated energy firms on the planet decides to form a MLP, you just know it’s going to be a doozy. And that’s what investors get with Shell Midstream Partners LP (SHLX).
Major integrated giant Royal Dutch Shell Plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) has a lot of pipelines and midstream assets under its umbrella. That includes seven tank farms, 11,800 miles worth of pipelines plus numerous gathering lines, fractionation capacity and other energy-related transportation assets.
Like so many energy firms, RDS saw the opportunity to reduce its taxable burden and formed SHLX to hold much of this infrastructure.
As we saw with WES and APC, SHLX’s main customer is the integrated giant, and the MLP continues to get a steady source of cash flows from it. It also continues to get plenty of accreditive dropdowns.
Since its IPO back in 2014, SHLX has purchased $1.9 billion worth of assets from RDS and it has plans to buy around $2.5 billion more in the upcoming years. This includes a hefty dose of planned chemicals pipelines as well as offshore and LNG-related assets. These should continue to drive growth and cash flows at SHLX.
Not to mention its dividend.
While SHLX doesn’t yield as much as other MLPs, it still has plenty of dividend growth behind it. The firm recently announced its sixth consecutive quarterly distribution increase. That’ll continue as planned dropdowns are added and throw off hefty cash flows.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.