What a difference year makes! Last year at this time, energy-focused master limited partnerships (MLPs) were facing certain doom. Crude had hit its lows of around $27 per barrel, and the ripple effects were dire. Energy producers suffered hard and some even filed for bankruptcy protection. This bad news and the wave of selling that followed sent the typically high-yield MLP space — as represented by the Alerian MLP ETF (NYSEARCA:AMLP) — down to all-time lows.
But now, all of that seems to be a distant memory.
As gains in crude oil and natural gas prices have taken hold, so too have the MLPs. The AMLP fund is up nearly 75% from its lows.
Happy days are here again!
Looking forward, President Donald Trump’s focus on infrastructure and fast-tracking major pipeline projects bodes well for the MLP space. With a friend in the White House, MLPs are poised to be big winners over the rest of the year. Meanwhile, the sector continues to offer high yields, and distribution growth is even on the horizon.
With that in mind, here are seven high-yield MLPs to buy now, in order of yield.
High-Yield MLPs to Buy: Phillips 66 Partners (PSXP)
PSXP Yield: 3.9%
For MLPs to be really successful, they have to have strong parents and general partners. A perfect example of this is Phillips 66 Partners LP (NYSE:PSXP), which benefits from its relationship with refining superstar Phillips 66 (NYSE:PSX).
After being spun out itself from one of America’s largest energy firms — ConocoPhillips (NYSE:COP) — Phillips 66 had a lot of pipelines, terminals and other midstream assets powering its refining facilities and moving its products, and continues to add to this asset base to this day.
The key has been dropping these assets down into PSXP at instantly accretive rates; they immediately produce cash flows and help power the MLP’s distributions. Last year alone, PSXP received more than $2.3 billion in projects from its parent.
For PSXP unitholders, these drop-downs translate into a relatively high and steady growing distribution. Since its IPO in 2013, Phillips 66 Partners has raised its distribution for 13 consecutive quarters. And because PSX still has plenty of pipelines left to add to PSXP, the MLP expects to raise its distribution by a compound annual growth rate of 30% over the next few years.
So while PSXP’s roughly 4% yield isn’t big for an MLP, it will get larger over time for patient investors.
High-Yield MLPs to Buy: Western Gas Partners (WES)
WES Yield: 5.5%
Western Gas Partners, LP (NYSE:WES) is another high-yield MLP to buy because of its strong GP/MLP relationship.
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.
These primarily are wells that are already tapped and pumping out crude; there’s no real production risk here. Anadarko needs to get this oil and natural gas to market, and it sends the supply through Western’s pipelines. It’s as simple as that. That simplicity provides plenty of uninterrupted cash flows Western’s way.
The real kicker is that when Anadarko taps a new region, Western Gas gets the nod to be the midstream supplier. This, plus organic expansion plans, have only acted as rocket fuel to the distribution on WES stock, which has grown by more than 440% since 2008.
High-Yield MLPs to Buy: Tallgrass Energy Partners (TEP)
TEP Yield: 6.1%
While Tallgrass Energy Partners LP (NYSE:TEP) might not be a household name, this MLP owns some of the most important pieces of energy infrastructure in the Rocky Mountains and Midwest of the United States.
This includes several FERC-regulated, high-use pipelines leading into the oil hub of Cushing, Oklahoma. All of these pipelines feature strong volumes and cash flows, which have benefited Tallgrass’ distribution growth and shareholders.
Since its IPO in 2013, TEP has risen its payout by a whopping 575% as volumes across its main pipelines continue to grow.
But Tallgrass isn’t resting here. TEP recently took a much bigger stake in the Rockies Express Pipeline from Sempra Energy (NYSE:SRE) for $440 million. That gives TEP more than 75% ownership of the “REX” Pipeline. That’s great, as it’s becoming the Americas’ northernmost natural gas header system and has continued to see higher and higher volumes.
Increased REX ownership stake means a bigger piece of the pie. Thus, TEP is among the best MLPs to buy now because it should keep up its torrid pace of distribution growth.
High-Yield MLPs to Buy: TC Pipelines (TCP)
TCP Yield: 6.2%
On its own, TC Pipelines, LP (NYSE:TCP) has been a pretty good high-yield MLP to own. TCP’s main assets include seven critical, FERC-regulated pipelines that move roughly 8% of America’s daily natural gas demand.
Those boring and heavily regulated pipelines churn out incredibly steady cash flows. As a result, TCP has managed to grow its distributions fairly regularly since its IPO in 1999, improving the payout by a little more than 90% since launching.
Yes, that’s low compared to some of the other MLPs on this list, but 100% of TCP’s business is regular (read: steady) assets.
That said, real gains could be coming from planned drop-downs from parent TransCanada Corporation (USA) (NYSE:TRP).
After going on a buying binge and snagging Columbia Pipeline Group and its MLP, TransCanada now has plenty of new FERC-regulated pipelines that it could drop into TCP. And given that those pipelines already have plenty of users and steady volume, that should instantly boost TC Pipelines’ cash flows, and thus its distributions.
These drop-downs might not happen right away, but TCP still should be able to grow its payout based on the rising volumes through already-owned lines.
High-Yield MLPs to Buy: TransMontaigne Partners (TLP)
TLP Yield: 6.3%
Pipelines are pretty boring, but there’s perhaps nothing more boring than owning the tail end of the pipeline.
TransMontaigne Partners L.P. (NYSE:TLP) focuses solely on terminal assets and storage tank farms. Terminaling is basically the last piece before crude oil, fertilizer, gasoline, etc., is shipped to end users.
It’s one of the most important steps of the midstream sector, and TransMontaigne owns vast storage farms near various key 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. Every step of the way, TransMontaigne collects a fee on the storage and handling.
It’s boring, but it’s immensely profitable. And TLP continues to achieve record levels of revenues, earnings and cash flow
TransMontaigne covers its distribution by more than 1.4x, and has begun the process of sending more cash to investors. The MLP’s latest quarterly distribution was the fifth straight increase, representing distribution growth of more than 6% over the past 12 months.
High-Yield MLPs to Buy: Tesoro Logistics (TLLP)
TLLP Yield: 6.5%
Tesoro Logistics LP (NYSE:TLLP) originally was created to hold all of refiner Tesoro Corporation’s (NYSE:TSO) pipeline and terminaling assets. These were all the pipelines that fed TSO’s refiners with crude oil and took away all the refined gasoline, heating and jet fuel.
This relationship is a guaranteed source of payments for TLLP.
As Tesoro Logistics’ bank account has gotten fat with its parent’s cash, the MLP has used that extra cash to expand into oil products and natural gas pipelines, storage tank farms and terminal/trucking assets. This has helped lubricate a virtuous cycle of earnings growth; profits have expanded by nearly 1,700% since 2013.
More gains could come from recent moves by parent Tesoro Corporation. Tesoro is buying smaller rival Western Refining, Inc. (NYSE:WNR) and its MLP. The MLP isn’t as large as TLLP, but the addition of those assets to Tesoro Logistics should only help.
Not that TLLP needs it. This high-yield MLP has grown its payout by 160% since its 2011 IPO.
High-Yield MLPs to Buy: E-TRACS Alerian MLP Infrastructure Index ETN (MLPI)
MLPI Yield: 6.4%
While the yield is slightly less than TLLP’s, we decided to tuck the E-TRACS Alerian MLP Infrastructure Index ETF (NYSE:MLPI) — and exchange-traded fund that holds high-yield MLPs — in here at the end.
MLPI is an exchange-traded note, which is debt wrapped up like an ETF — but it doesn’t actually hold any assets. So while MLPI tracks the same index of MLPs as the previously mentioned Alerian MLP ETF, and produces returns based on the performance and distributions of its basket of 22 different midstream firms, it doesn’t hold any of them.
Why MLPI? Because as an ETN, MLPI pays no corporate taxes. The thing about MLPs is that mutual funds and ETFs can’t hold more than 25% of their assets in them. Most MLP ETFs are actually corporations designed to mimic index funds. As a result, they need to pay taxes on the distributions they receive before then hand them to you. That zaps returns and results in very high expense ratios.
Not so for MLPI. All investors end up paying here is the ETN’s 0.85% expense ratio, or $85 annually on every $10,000 invested.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.