Published by Bob Ciura on June 15th, 2017
Master Limited Partnerships can be a great source of investment income.
But they can also be very risky, as investors saw first-hand over the past year.
Many MLPs took on too much debt to buy up assets when oil was at $100 per barrel. But when commodity prices sank, many MLPs had to cut their dividends to avoid insolvency.
Fortunately, there are still high-quality MLPs out there, such as TransMontaigne Partners LP (TLP).
TLP has a current dividend yield of 7.3%. It is one of 416 stocks with a 5%+ dividend yield.
It is also a Dividend Achiever, a group of 264 stocks with 10+ years of consecutive dividend increases.
MLPs can be hard to trust, and it is understandable for wary investors to view the MLP space with reservation.
That said, TLP kept on raising its dividend during the downturn over the past three years, and will likely continue to do so for many years moving forward.
TLP is a midstream energy company, operating terminals, storage facilities, and transportation of oil.
TLP has a vast network of 48 terminals across five U.S. regions: Florida, the Southeast, Texas, the Midwest, and along the Mississippi and Ohio rivers.
These assets have capacity for 32.1 million barrels.
Source: June 2017 MLP Association Presentation, page 5
The company also has a high-quality customer base. Approximately 95% of TLP’s storage capacity is contracted.
As an MLP, there is a General Partner—in this case, TLP’s General Partner is ArcLight Energy Partners, which acquired 100% of the GP. The new GP now holds a 2% interest and 100% of the Incentive Distribution Rights.
TLP operates a fee-based, take-or-pay model. This means TLP’s customers either receive the product, or pay a penalty.
The fee-based midstream model typically results in stable cash flow. The model operates similarly to a roll road, in that TLP generates fees based on volumes transported and stored throughout its network.
And, these contracts are typically long-term. Approximately 88% of current contracts are 1-5 years in duration. More than half are at least 3 years in duration.
TLP’s quality assets have helped the company grow for a prolonged period.
In 2016, earnings before interest, taxes, depreciation, and amortization (EBIDTA) rose 6.7%. From 2012-2016, EBITDA increased 33% over the five-year period.
The company achieved record levels of revenue, EBITDA, and distributable cash flow for the year. Earnings-per-share rose 1%.
Going forward, capacity additions and new projects will help fuel continued growth.
TLP has three main drivers of growth, which are maximizing the performance of its existing assets, internally investing in organic growth projects, and obtaining growth through acquisitions.
The most important growth catalyst for an MLP is new projects. These are critical to ensuring continued growth.
TLP has several major growth projects that, once completed, should provide growth going forward. One example is the Collins Phase I expansion project.
Source: June 2017 MLP Association Presentation, page 12
TLP placed 1.2 million barrels of new contracted storage into service last quarter. Phase One of the Collins project entails bringing another 800,000 barrels of storage capacity online by the end of the current quarter.
Phase Two of the Collins project will see an additional 2 million-5 million barrels of storage capacity, with an expected return on investment in the high-teens.
There is also an opportunity to expand capacity at the River and Brownsville terminals, where TLP hopes to add another 1.4 million barrels of storage capacity.
Improving the performance of existing assets will allow TLP to re-negotiate contracted assets with new contract agreements, at higher rates.
TLP has a pattern of consistent dividend increases. For example, on April 17th the company raised its distribution by $0.015 per share. This represents a 2.1% increase from the previous quarter, and a 6.6% increase from the same quarterly distribution in 2016.
TLP has increased its distribution for 12 years. Since its initial public offering in May 2005, the distribution has been raised by 81% overall.
Source: June 2017 MLP Association Presentation, page 16
The new annualized dividend rate will be $2.90 per share. Based on TLP’s June 14th closing share price of $39.60, the dividend has a hefty current yield of 7.3%.
This is a very attractive yield for dividend investors, such as retirees, who desire higher levels of investment income. That is especially the case, given the available alternatives.
The S&P 500 Index, on average, yields 2.1% right now. In addition, the 10-Year U.S. Treasury Bond yields 2.1% as well.
In a low interest rate environment, TLP’s 7.3% yield is enticing.
More importantly, investors should assess whether a company’s distribution is sustainable. Many high-yield MLPs cut or suspended their dividends when oil and gas prices sank, due to overly-leveraged balance sheets in many cases.
Fortunately, TLP has a solid balance sheet with sufficient distribution coverage.
Distribution coverage has improved over the past few years, despite the persistent declines in commodity prices since 2014:
- 2014 distribution coverage ratio of 1.31
- 2015 distribution coverage ratio of 1.39
- 2016 distribution coverage ratio of 1.40
Last year, TLP generated 40% more distributable cash flow than it needed to pay its dividend. The trend has continued to improve in 2017: TLP’s distribution coverage expanded to 1.61 in the first quarter.
This is a very positive trend that should allow TLP to continue raising distributions each year.
One big reason for TLP’s impressive dividend coverage is that it has a strong balance sheet, with manageable levels of debt.
For example, TLP has a debt-to-EBITDA ratio of 2.9 over the past 12 months. This is far below the MLP average. MLPs that cut their dividends often have debt-to-EBITDA ratios above 4.0 or 5.0.
TLP has managed to perform well, in a difficult operating climate for most energy companies. Its stable business model has allowed the company to maintain its hefty dividend, even during the industry downturn.
New storage capacity should provide for continued growth. And, TLP’s hefty dividend appears sustainable, given the company’s rising distribution coverage and falling debt ratios.
As a result, TLP is an attractive option for income-seeking investors.