Updated weekly on Wednesdays
By Ben Reynolds, Aristofanis Papadatos, & Nick McCullum
Master limited partnerships – or MLPs, for short – are some of the most misunderstood investment vehicles in the public markets.
And that’s a shame, because the typical MLP offers:
- Tax-advantaged income
- High yields well in excess of market averages
- The bulk of corporate cash flows returned to shareholders through distributions
An example of a ‘normal’ MLP is an organization involved in the midstream energy industry. Midstream energy companies are in the business of transporting oil, primarily though pipelines. Pipeline companies make up the vast majority of MLPs.
So how can you find publicly-traded MLPs suitable for investment? Using the MLP Excel Spreadsheet available for download below is a great place to start:
This comprehensive article covers MLPs in depth. The table of contents below gives an overview of what this article contains.
Table of Contents
- The Complete List of MLPs
- The History of Master Limited Partnerships
- MLP Tax Consequences
- 5 Advantages & 6 Disadvantages of Investing in MLPs
- The 10 Best MLPs Today
- MLP ETFs, ETNs, & Mutual Funds
- Final Thoughts
The Complete List of MLPs
The sortable table below summarizes the information in our free Excel spreadsheet. It gives you the ability to quickly find the largest MLPs by market cap, the highest yielding MLPs, and more.
|Ticker||Name||Price||Dividend Yield||Market Cap ($M)||P/E Ratio||Payout Ratio|
|AB||AllianceBernstein Holding LP||30.46||8.8||2,893.5||12.8||112.3|
|AM||Antero Midstream Corp.||11.21||4.8||5,681.8||38.3||184.8|
|AMGP||Antero Midstream GP LP||12.54||3.6||2,335.4||38.6||139.1|
|AMID||American Midstream Partners LP||5.24||0.0||285.3||-7.4||0.0|
|ANDX||Andeavor Logistics LP||35.65||11.5||8,756.7||13.9||160.2|
|APO||Apollo Global Management LLC||34.94||5.2||14,778.9||51.0||267.2|
|APU||AmeriGas Partners LP||34.44||11.0||3,202.9||59.9||661.0|
|ARES||Ares Management Corp.||28.14||4.1||6,197.9||93.2||384.1|
|ARLP||Alliance Resource Partners LP||16.91||12.4||2,171.1||4.6||56.5|
|ATAX||America First Multifamily Investors LP||7.09||7.1||428.4||12.0||84.9|
|ATLS||Atlas Energy Group LLC||0.01||0.0||0.4||-0.1||0.0|
|BEP||Brookfield Renewable Partners LP||36.01||5.5||11,108.4||148.9||817.6|
|BIP||Brookfield Infrastructure Partners LP||43.79||4.4||17,840.7||604.0||2,637.9|
|BKEP||BlueKnight Energy Partners LP||1.35||28.5||55.0||-0.8||-23.2|
|BPL||Buckeye Partners LP||41.31||9.7||6,358.5||-67.8||-660.4|
|BPY||Brookfield Property Partners LP||18.85||6.8||16,311.8||9.3||62.6|
|BSM||Black Stone Minerals LP||14.86||9.4||3,056.9||12.6||117.4|
|BX||The Blackstone Group, Inc.||46.05||4.7||53,583.0||18.9||89.8|
|CCLP||CSI Compressco LP||3.57||16.0||168.0||-4.7||-75.3|
|CCR||CONSOL Coal Resources LP||16.09||12.7||444.6||7.5||96.0|
|CELP||Cypress Energy Partners LP||7.30||11.5||88.0||10.0||114.6|
|CEQP||Crestwood Equity Partners LP||36.71||6.5||2,653.3||-89.4||-584.2|
|CG||The Carlyle Group LP||23.67||5.7||8,069.1||12.9||73.0|
|CINR||Ciner Resources LP||16.94||13.4||334.4||6.5||87.1|
|CLMT||Calumet Specialty Products Partners LP||4.73||0.0||366.4||-11.1||0.0|
|CNXM||CNX Midstream Partners LP||14.54||9.4||926.6||7.4||69.7|
|CODI||Compass Diversified Holdings||19.52||7.4||1,169.2||-27.3||-201.7|
|CPLP||Capital Product Partners LP||11.42||17.5||207.6||-1.3||-22.4|
|CQP||Cheniere Energy Partners LP||43.50||5.2||21,055.1||162.0||848.8|
|DCP||DCP Midstream LP||30.67||10.2||4,398.4||46.2||470.1|
|DKL||Delek Logistics Partners LP||31.98||9.8||780.5||12.5||121.6|
|DLNG||Dynagas LNG Partners LP||1.41||57.6||50.0||-6.1||-352.2|
|DMLP||Dorchester Minerals LP||19.23||9.7||666.9||11.3||109.8|
|ECT||ECA Marcellus Trust I||1.70||18.5||29.9||5.3||98.4|
|EEP||Enbridge Energy Partners, L.P.||0.00||0.0||0.0|
|EFC||Ellington Financial, Inc.||18.30||9.7||544.4||13.5||131.5|
|EMES||Emerge Energy Services LP||0.21||0.0||6.5||0.5||0.0|
|ENBL||Enable Midstream Partners LP||13.96||9.1||6,073.6||12.3||111.9|
|ENLC||EnLink Midstream LLC||10.30||10.4||5,627.1||-17.3||-180.7|
|EPD||Enterprise Products Partners LP||30.16||5.7||65,963.2||14.6||83.5|
|EQM||EQM Midstream Partners LP||41.63||10.6||8,345.1||14.0||147.8|
|ETP||Energy Transfer Partners, L.P.||0.00||0.0||0.0|
|EVA||Enviva Partners LP||30.43||8.3||805.8||59.5||494.3|
|FELP||Foresight Energy LP||0.65||35.3||94.8||-1.7||-58.6|
|FGP||Ferrellgas Partners LP||0.92||0.0||89.5||-0.4||0.0|
|FUN||Cedar Fair LP||50.21||7.2||2,841.1||22.3||161.4|
|GEL||Genesis Energy LP||23.02||9.3||2,821.8||-40.6||-377.6|
|GLOP||GasLog Partners LP||21.31||10.0||968.5||14.5||145.3|
|GLP||Global Partners LP||19.95||9.6||678.2||14.3||137.5|
|GMLP||Golar LNG Partners LP||11.75||16.7||833.0||19.0||317.1|
|GPP||Green Plains Partners LP||14.01||13.6||324.2||7.7||105.1|
|HCLP||Hi-Crush Partners LP||2.30||0.0||232.5||2.5||0.0|
|HEP||Holly Energy Partners LP||28.76||9.2||3,031.9||16.5||151.8|
|HESM||Hess Midstream Partners LP||20.60||6.8||1,125.3||16.1||110.1|
|HMLP||Höegh LNG Partners LP||17.70||9.9||587.9||10.3||102.3|
|IEP||Icahn Enterprises LP||75.32||9.6||14,780.5||9.0||86.4|
|JMP||JMP Group LLC||3.79||0.0||80.0||24.9||0.0|
|KKR||KKR & Co., Inc.||25.51||2.3||21,443.9||8.2||18.9|
|KNOP||KNOT Offshore Partners LP||20.11||10.3||657.5||10.6||109.4|
|KRP||Kimbell Royalty Partners LP||15.91||10.7||746.3|
|LGCY||Legacy Reserves, Inc.||0.06||0.0||6.8|
|LMRK||Landmark Infrastructure Partners LP||16.77||8.8||424.3||4.1||35.7|
|MCEP||Mid-Con Energy Partners LP||0.43||0.0||13.1||-0.8||0.0|
|MMLP||Martin Midstream Partners LP||6.95||28.8||270.4||9.9||283.9|
|MMP||Magellan Midstream Partners LP||65.63||5.9||14,990.1||11.3||66.4|
|NAP||Navios Maritime Midstream Partners L.P.||0.00||0.0||0.0|
|NBLX||Noble Midstream Partners LP||31.13||7.0||743.6||7.8||54.8|
|NEN||New England Realty Associates LP||59.99||2.0||183.8||41.4||84.3|
|NGL||NGL Energy Partners LP||15.20||10.3||1,914.7||7.6||77.9|
|NMM||Navios Maritime Partners LP||17.18||7.0||188.7||-6.7||-47.1|
|NRP||Natural Resource Partners LP||32.71||5.5||401.1||3.4||18.5|
|NS||NuStar Energy LP||28.40||8.5||3,060.5||-4.3||-36.6|
|OAK||Oaktree Capital Group LLC||49.98||5.9||8,105.0||17.4||102.7|
|OZM||Och-Ziff Capital Management Group, Inc.||22.49||3.7||1,572.2||60.9||222.6|
|PAA||Plains All American Pipeline LP||24.48||4.9||17,858.0||6.6||32.3|
|PAGP||Plains GP Holdings LP||24.88||4.8||19,810.8||8.9||42.8|
|PBFX||PBF Logistics LP||21.66||9.2||1,342.9||13.2||121.3|
|POPE||Pope Resources LP||69.74||5.0||304.3||71.4||358.3|
|PSXP||Phillips 66 Partners LP||51.35||6.0||6,404.7||12.0||72.3|
|RHNO||Rhino Resource Partners LP||0.61||0.0||9.6||-0.5||0.0|
|SDLP||Seadrill Partners LLC||3.41||90.9||25.7||2.0||181.3|
|SEP||Spectra Energy Partners, LP||0.00||0.0||0.0|
|SGU||Star Group LP||9.68||4.9||484.8||13.1||63.6|
|SHLX||Shell Midstream Partners LP||21.22||7.0||4,950.4||12.0||84.3|
|SMLP||Summit Midstream Partners LP||7.45||30.9||616.1||-21.9||-676.5|
|SNMP||Sanchez Midstream Partners LP||2.23||53.9||40.8||-1.3||-72.5|
|SPH||Suburban Propane Partners LP||23.76||10.1||1,465.2||18.1||182.7|
|SPLP||Steel Partners Holdings LP||14.00||5.4||349.4||-45.5||-243.5|
|SRLP||Sprague Resources LP||18.00||14.8||409.1||13.4||197.2|
|STON||StoneMor Partners LP||1.96||0.0||75.0||-1.0||0.0|
|SXCP||SunCoke Energy Partners LP||12.54||12.8||579.7||11.9||151.9|
|SXE||Southcross Energy Partners, L.P.||0.27||0.0||25.6||-0.3||0.0|
|TCP||TC Pipelines LP||39.72||6.6||2,888.0||-14.6||-96.2|
|TGP||Teekay LNG Partners LP||15.57||3.6||1,223.8||40.8||146.8|
|TLP||TransMontaigne Partners L.P.||40.99||7.6||665.2||24.3||183.8|
|TOO||Teekay Offshore Partners LP||1.25||145.0||513.0||-2.9||-426.4|
|UAN||CVR Partners LP||3.70||3.2||419.1||-11.0||-35.7|
|USAC||USA Compression Partners LP||18.10||11.6||1,747.7||-59.7||-692.8|
|USDP||USD Partners LP||11.88||12.0||314.9||20.6||246.6|
|VNOM||Viper Energy Partners LP||30.40||7.1||4,103.9||15.2||108.2|
|WES||Western Midstream Partners LP||30.56||7.7||13,905.2||20.0||153.3|
|WGP||Western Midstream Partners LP||33.46||6.9||7,163.7||19.8||136.0|
|WLKP||Westlake Chemical Partners LP||23.85||7.0||839.2||14.8||102.7|
|WMLP||Westmoreland Resource Partners, LP||0.00||0.0||0.0|
|WPZ||Williams Partners L.P.||0.00||0.0||0.0|
|Ticker||Name||Price||Dividend Yield||Market Cap ($M)||P/E Ratio||Payout Ratio|
Additionally, you can download our sortable MLP spreadsheet and save it for access any time.
The History of Master Limited Partnerships
MLPs were created in 1981 to allow certain business partnerships to issue publicly traded ownership interests.
The first MLP was Apache Oil Company, which was quickly followed by other energy MLPs, and then real estate MLPs.
The MLP space expanded rapidly until a great many companies from diverse industries operated as MLPs – including the Boston Celtics basketball team.
Below, you can see a diagram showing the change in the sector concentration of MLPs over time.
Source: Master Limited Partnership Association ‘MLP 101’ Presentation, slide 20
One important trend that can be seen in the diagram above is that energy MLPs have grown from being roughly one-third of the total MLP universe to containing the vast majority of these securities.
Moreover, the energy MLP universe has evolved to be focused on midstream energy operations. Midstream partnerships have grown to be roughly half of the total number of energy MLPs.
Source: Master Limited Partnership Association ‘MLP 101’ Presentation, slide 21
MLP Tax Consequences
Master limited partnerships are tax-advantaged investment vehicles. They are taxed differently than corporations.
MLPs are pass-through entities. They are not taxed at the entity level. Instead, all money distributed from the MLP to unit holders is taxed at the individual level.
Distributions are ‘passed through’ because MLP investors are actually limited partners in the MLP, not shareholders. Because of this, MLP investors are called unit holders, not shareholders. And, the money MLPs pay out to unit holders is called a distribution (not a dividend).
The money passed through from the MLP to unit holders is classified as either:
- Return of Capital
- Ordinary Income
MLPs tend to have lots of depreciation and other non-cash charges. This means they often have income that is far lower than the amount of cash they can actually distribute. The cash distributed less the MLPs income is a return of capital.
A return of capital is not technically income, from an accounting and tax perspective. Instead, it is considered as the MLP actually returning a portion of its assets to unit holders.
Now here’s the interesting part… Returns of capital taxes reduce your cost basis, and are only due when you sell your MLP units. Returns of capital are tax-deferred.
Note: Return of capital taxes are also due on the amount that your cost basis is less than $0. This only happens in the event of very long-term holding, typically around 10 years or more.
Each individual MLP is different, but on average an MLPs distribution is usually around 80% to 90% a return of capital, and 10% to 20% ordinary income.
This works out very well from a tax perspective. The images below compare what happens when a corporation and an MLP each have the same amount of cash to send to investors.
Note 1: Taxes are never simple. Some reasonable assumptions had to be made to simplify the table above. These are listed below:
- Corporate federal income tax rate of 21%
- Corporate state income tax rate of 5%
- Qualified dividend tax rate of 20%
- Distributable cash is 80% a return of capital, 20% ordinary income
- Personal federal tax rate of 22% less 20% for passive entity tax break
(19.6% total instead of 22%)
- Personal state tax rate of 5% less 20% for passive entity tax break
(4% total instead of 5%)
- Long-term capital gains tax rate of 20% less 20% for passive entity tax break
(16% total instead of 20%)
Note 2: The 20% passive income entity tax break is part of President Trump’s new tax plan, and will expire in 2025.
Note 3: In the MLP example, if the maximum personal tax rate of 37% is used, the distribution after all taxes is $8.05.
Note 4: In the MLP example, the accrued cost basis reduction tax is due when the MLP is sold, not annually come tax time.
As the tables above show, MLPs are far more efficient vehicles for returning cash to shareholders relative to corporations. Additionally, in the example above $9.57 out of $10.00 distribution would be kept by the MLP investor until they sold because the bulk of taxes are from returns of capital and not due until the MLP is sold.
Return of capital and other issues discussed above do not matter when MLPs are held in a retirement account.
There is a different issue with holding MLPs in a retirement account, however. This includes 401(k), IRA, and Roth IRA accounts, among others.
When retirement plans conduct or invest in a business activity, they must file separate tax forms to report Unrelated Business Income (UBI) and may owe Unrelated Business Taxable Income (UBTI). UBTI tax brackets go up to 37% (the top personal rate).
MLPs issue K-1 forms for tax reporting. K-1s report business income, expense, and loss to owners. Therefore, MLPs held in retirement accounts may still qualify for taxes.
If UBI for all holdings in your retirement account is over $1,000, you must have your retirement account provider (typically, your brokerage) file Form 990-T. You will want to file form 990-T as well if you have a UBI loss to get a loss carryforward for subsequent tax years. Failure to file form 990-T and pay UBIT can lead to severe penalties. Fortunately, UBIs are often negative. It is a fairly rare occurrence to owe taxes on UBI.
The subject of MLP taxation can be complicated and confusing. Hiring a tax professional to aid in preparing taxes is a viable option for dealing with the complexity.
The bottom line is this: MLPs are tax-advantaged vehicles that are suited for investors looking for current income. It is fine to hold them in either taxable or non-taxable (retirement) accounts. Since retirement accounts are already tax-deferred, holding MLPs in taxable accounts allows you to ‘get credit’ for the full effects of their unique structure.
5 Advantages & 6 Disadvantages of Investing in MLPs
MLPs are a unique asset class. As a result, there are several advantages and disadvantages to investing in MLPs. Many of these advantages and disadvantages are unique specifically to MLPs.
Advantage #1: Lower taxes
MLPs are tax-advantaged securities, as discussed in the “Tax Consequences” section above. Depending on your individual tax bracket, MLPs are able to generate around 40% more after-tax income for every pre-tax dollar they decide to distribute, versus Corporations.
Advantage #2: Tax-deferred income through returns of capital
In addition to lower taxes in general, 80% to 90% of the typical MLPs distributions are classified as returns of capital. Taxes are not 0wed (unless cost basis falls below 0) on return of capital distributions until the MLP is sold. This creates the favorable situation of tax-deferred income.
Tax-deferred income is especially beneficial for retirees as return on capital taxes may not need to be paid throughout retirement.
Advantage #3: Diversification from other asset classes
Investing in MLPs provides significant diversification in a balanced portfolio. Diversification can be measured by the correlation in return series between asset classes. The image below shows the correlations between the largest MLP ETF (AMLP) and several other asset classes from 8/25/2010 (which is the first day the AMLP ETF was publicly traded) through 9/11/2018.
In the image above, the tickers above represent the following asset classes:
- AMLP, MLPs
- VNQ, Real Estate Investment Trusts [REITs]
- SPY, S&P 500
- TLT, Long-Term US Treasuries
- GLD, Gold
- LQD, Corporate Bonds
MLPs are excellent diversifiers, having either a near zero or negative correlation to corporate bonds, government bonds, and gold. Additionally, they have a correlation coefficient of less than 0.5 to both REITs and the S&P 500. This makes MLPs an excellent addition to a diversified portfolio.
Advantage #4: Typically very high yields
MLPs tend to have yields far in excess of the broader market. As of this writing, the S&P 500 yields 1.7%, while the Alerian MLP ETF (AMLP) yields 7.6%. Many individual MLPs have yields above 10%.
Advantage #5: Excellent historical total returns
Finally, MLPs have generated excellent returns as an asset class.
The typically high dividend yields of master limited partnerships are a large reason why these entities have outperformed other asset classes in recent history.
The performance of energy MLPs is compared to the other major asset classes in the following diagram.
Disadvantage #1: Complicated tax situation
MLPs can create a headache come tax season. MLPs issue K-1’s and are generally more time-consuming and complicated to correctly calculate taxes than ‘normal’ stocks.
Disadvantage #2: Potential additional paperwork if held in a retirement account
In addition, MLPs create extra paperwork and complications when invested through a retirement account because they potentially create unrelated business income (UBI). See the “Tax Consequences” section above for more on this.
Disadvantage #3: Little diversification within the MLP asset class
While MLPs provide significant diversification versus other asset classes, there is little diversification within the MLP structure. The vast majority of publicly traded MLPs are oil and gas pipeline businesses. There are some exceptions, but in general MLP investors are investing in energy pipelines and not much else. Because of this, it would be unwise to allocate all or a majority of one’s portfolio to this asset class.
Disadvantage #4: Incentive Distribution Rights (IDRs)
MLP investors are limited partners in the partnership. The MLP form also has a general partner. The general partner is usually the management and ownership group that controls the MLP, even if they own a very small percentage of the actual MLP.
Incentive Distribution Rights, or IDRs, are used to ‘incentivize’ the general partner to grow the MLP. IDRs typically allocate greater percentages of cash flows to go to the general partner (and not to the limited partners) as the MLP grows its cash flows. This reduces the MLPs ability to grow its distributions, putting a handicap on distribution increases.
It should be noted that not all MLPs have IDRs, but the majority do.
Disadvantage #5: Elevated risk of distribution cuts due to high payout ratios
One of the big advantages of investing in MLPs is their high yields. Unfortunately, high yields very often come with high payout ratios.
Most MLPs distribute nearly all of the cash flows they make to unit holders. In general, this is a positive. However, it creates very little room for error. The pipeline business is generally stable, but if cash flows decline unexpectedly, there is almost no margin of safety at many MLPs. Even a short-term disturbance in business results can necessitate a reduction in the distribution.
Disadvantage #6: Growth Through Debt & Share Issuances
Since MLPs typically distribute virtually all of their cash flows as distributions, there is very little money left over to actually grow the partnership.
And most MLPs strive to grow both the partnership, and distributions, over time. To do this, the MLP’s management must tap capital markets by either issuing new units or taking on additional debt.
When new units are issued, existing unit holders are diluted; their percentage of ownership in the MLP is reduced. When new debt is issued, more cash flows must be used to cover interest payments instead of going into the pockets of limited partners through distributions.
The 10 Best MLPs Today
- Return from change in valuation multiple
- Return from distribution yield
- Return from growth on a per share basis
Continue reading for detailed analysis on each of our top 10 highest ranked MLPs.
#10: Magellan Midstream Partners
Magellan Midstream Partners (MMP) has the longest pipeline system of refined products. It is linked to nearly half of total U.S. refining capacity. This segment generates 54% of its total operating income while the transportation and storage of crude oil generates 38% of its operating income.
MMP is a stand-out MLP. It has the discipline to invest only in high-return growth projects and hence it is very different from the vast majority of MLPs. Most MLPs dilute their shareholders on a regular basis in order to fund their growth projects. Moreover, they tend to carry excessive amounts of debt, they post poor free cash flows and usually have payout ratios near or above 100%.
MMP is completely different. It has spent $5.4 B on growth projects in the last decade but, thanks to its strong free cash flows, it has raised only 5% of this amount via issuance of new shares. As a result, it has kept its share count essentially flat for seven consecutive years. In addition, thanks to its ample free cash flows, it has one of the strongest balance sheets in the MLP sector, with a leverage ratio of 3.4.
In the latest conference call, management stated that it expected to spend $2.5 B on growth projects through the end of 2020, primarily related to the pipeline system of refined products and marine storage. Given the proven discipline of management to invest only in high-return projects, this is certainly good news for unit holders. Moreover, management has confirmed that it does not expect to issue new shares in the years ahead.
The intelligent execution of MMP is reflected in its exceptional distribution record. The MLP has raised its distribution for 64 consecutive quarters and has raised it at a 12% average annual rate over the last 17 years. This is a remarkable achievement, particularly given that this period includes the Great Recession and the recent downturn of the oil sector.
Source: Investor Presentation
Management has guided for 5%-8% annual growth of distributable cash flow and an equal distribution growth rate for the upcoming years.
Overall, MMP currently offers an attractive 5.5% distribution yield and it is likely to raise its distribution in the upcoming years. In addition, thanks to its promising pipeline of growth projects, the MLP is likely to continue to grow its EBITDA and its distributable cash flow. Given also its current reasonable valuation, investors can expect a double-digit total annual return in the upcoming years.
#9: Brookfield Infrastructure Partners
Brookfield Infrastructure Partners (BIP) is one of the largest global owners and operators of infrastructure networks.
The MLP has marginally missed the analysts’ estimates in each of the first two quarters of this year. However, its somewhat disappointing results were caused by non-recurring factors, such as an asset sale in its utility segment and a nationwide truck driver strike in Brazil. As the strike has been resolved and business conditions look favorable, performance is likely to improve over the rest of the year and the years ahead.
Thanks to its successful past investments, Brookfield Infrastructure Partners has managed to raise its distribution by 11% per year on average during the last five years.
Source: Investor Presentation
Management has stated that it targets a 60%-70% payout ratio relative to the funds from operations. Given this target ratio and its growth expectations, management expects to raise the distribution at a 5%-9% annual rate in the upcoming years.
Brookfield Infrastructure Partners has a promising pipeline of investment opportunities. Management expects to spend $1.3 B on three large-scale projects in North America:
- A U.S. data center business
- A Western Canadian midstream business
- And a residential energy infrastructure business
These projects have been approved after a strict screening process through which management identified the projects with the highest potential return.
Thanks to its promising pipeline of projects, the MLP is likely to offer meaningful growth to its shareholders in the upcoming years. On the other hand, the stock offers a 4.7% distribution yield, which is much lower than the yield of the other MLPs mentioned in this article.
Moreover, Brookfield Infrastructure Partners carries a significant amount of debt, as its net debt stands at $14.5 B, which is 43 times its annual earnings, and its interest expense “eats” one third of its operating income.
Furthermore, while the wide diversification of its portfolio provides stability, we prefer MLPs that are more focused on their field of expertise. Overall, while the MLP is likely to offer meaningful returns in the years ahead, we recommend looking at other MLPs for higher returns.
#8: Brookfield Renewable Partners
Brookfield Renewable Partners (BEP) operates one of the world’s largest portfolios of publicly-traded renewable power assets. Thanks to its almost $3.5 B in investments in the last five years, the MLP currently has a portfolio of approximately 8,000 megawatts of hydroelectric assets, 6,000 megawatts of wind and solar facilities, and 3,000 megawatts of storage through its pumped hydro and battery facilities.
Source: Investor Presentation
In the past, most of the growth in renewable energy assets was driven by government subsidies, which aimed to reduce the emissions of carbon dioxide. However, this pattern has somewhat changed in recent years and investment in renewable energy assets has become much more reasonable from an economic point of view.
Brookfield Renewable Partners has certainly noticed this positive shift and has thus stated that it aims to offer 12%-15% annual long-term returns to its shareholders. Moreover, while subsidies have decreased, governments continue to raise their targets for the share of renewable energy in the total energy mix. These targets will require significant investment in this type of energy for decades.
Apart from its promising growth prospects, Brookfield Renewable Partners also offers a generous 6.4% distribution yield. In addition, although it has invested heavily in its business for years, it has managed to post strong free cash flows for eight consecutive years. Therefore, given also its light schedule of debt maturities in the years ahead, the attractive distribution can be considered safe for the foreseeable future.
It is also worth noting that the MLP is minimally exposed to rising interest rates, as 86% of its debt has been locked at fixed rates for several years. On the other hand, its net debt is certainly high, as it stands at $15.4 B or about 24 times the free cash flows of the last 12 months.
Overall, thanks to its attractive and reliable distribution and its great growth prospects, Brookfield Renewable Partners is likely to highly reward its shareholders in the upcoming years.
#7: Energy Transfer Equity
Energy Transfer Equity (ETE) is essentially an investment holding company that owns all or portions of Energy Transfer Partners (ETP), Sunoco LP, Lake Charles LNG and USA Compression Partners (USAC).
On a consolidated basis, this family of companies owns and operates a diverse portfolio of natural gas, natural gas liquids, crude oil and refined products transportation and storage assets, as well as retail and wholesale motor fuel operations and LNG terminals.
Energy Transfer Equity recently announced that it will merge with ETP in order to simplify its structure. ETP unitholders will receive 1.28 ETE common units and the transaction will close in Q4.
More importantly, Energy Transfer Equity is completing a multi-year program of hefty capital expenses and thus it is transitioning from a prolonged difficult period of poor cash flows to a period in which it will enjoy ample cash flows. This is already evident, as the MLP grew its revenue by 50% in Q2 and exceeded analysts’ estimates by 12%. Distributable cash flow jumped 70% while the distribution coverage ratio climbed to a healthy 1.15. Even better, the MLP expects additional growth from the rest of the projects that will come online in the next two years.
The other great aspect of Energy Transfer Equity is the resilience of its business model. Approximately 80% of its midstream revenues are fee-based and come from minimum volume commitments of its customers. Most of the revenues of the other segments are fee-based as well.
Source: Investor Presentation
As a result, the performance of the MLP is resilient even amid the most adverse business conditions. This was evident in the Great Recession and in the recent downturn of the oil market, when most energy companies saw their earnings plunge but Energy Transfer Equity continued to grow its earnings and its distribution.
The MLP currently offers a 7.0% distribution yield. Given its healthy coverage ratio and its exciting growth prospects, investors can initiate a position in the MLP at an attractive yield and rest assured that the distribution will continue to rise in the years ahead.
#6: AmeriGas Partners LP
AmeriGas Partners LP (APU) is the largest retail propane marketer in the U.S. It serves almost two million customers in all 50 states via a network of 1,900 distribution locations.
Just like Suburban Propane Partners, the performance record of AmeriGas is characterized by pronounced volatility. This is natural, as its earnings are strongly related to the severity of the weather during the winter and the price of propane. On the other hand, AmeriGas is doing its best to identify growth initiatives in order to achieve long-term growth regardless of the prevailing weather conditions and commodity prices.
Source: Investor Presentation
AmeriGas is in the process of expanding its customer base in eastern and central Pennsylvania. The MLP has already added more than 11,000 new commercial and residential customers in the first three quarters of the fiscal year.
Like most MLPs, AmeriGas carries a significant amount of debt. Its net debt, which stands at $3.0 B, is about 15 times its annual earnings and thus results in an interest expense that “eats” 37% of its operating income. Due to lackluster performance and the rising interest rates in the last two years, the stock is now trading at a 2-year low. As a result, it currently offers a remarkable 9.6% distribution yield. While such an abnormal yield reflects the market’s concerns over a potential distribution cut, the free cash flows of AmeriGas are almost sufficient to support the current distribution.
Therefore, while a distribution cut cannot be completely excluded, it is not the most likely scenario going forward. A key point is the fact that the MLP enjoys strong free cash flows and has thus refrained from issuing new shares, which would have rendered its distribution more burdensome.
Overall, given the cheap valuation of AmeriGas, which has a P/EBITDA ratio of 6.0, its exceptional distribution and the focus of its management to consistently grow volumes, the MLP is likely to offer double-digit returns from its current level over the next few years.
#5: Holly Energy Partners
Holly Energy Partners (HEP) provides transportation, storage and throughput services for crude oil and refined products. It was founded by HollyFrontier (HFC) in 2004 and has operations in 10 states.
Holly Energy Partners has an attractive business model, which secures reliable cash flows even under the most adverse business conditions. Nearly all the revenues of the MLP are fee-based. This means that the revenues are not affected by the prevailing commodity prices. Instead they are proportional to the volumes transported and stored by the MLP. These volumes are reliable because they are determined by long-term contracts, which pose strict minimums to the customers of the MLP.
The virtues of the business model of Holly Energy Partners were prominent in the recent downturn of the oil market, which began with the collapse of the oil price in 2014. While other MLPs saw their earnings collapse, Holly Energy Partners has grown its earnings per share and its distributable cash flow per share by 57% and 59%, respectively, since 2014.
The strength of the business model is also clearly reflected in the exceptional distribution growth record of Holly Energy Partners. The MLP has raised its distribution for 55 consecutive quarters since its IPO in 2004.
Source: Investor Presentation
This is an impressive record, particularly given that the period includes both the Great Recession (which was the worst crisis of the last 80 years) and the recent downturn of the oil market.
Moreover, Holly Energy Partners has promising growth projects thanks to a series of growth initiatives. It acquired Salt Lake and Frontier pipelines last year and has thus greatly increased its total transported volumes this year. In addition, the MLP intends to build a truck loading rack in Texas. Thanks to these and other growth initiatives, the MLP is likely to continue to grow its cash flows and its distributions in the years ahead.
Investors should also note that the MLP currently offers an exceptional 9.0% distribution yield. Given the healthy payout ratio of 73%, the promising growth prospects and the impressive performance record of the MLP, investors can initiate a position at a remarkably high yield and rest assured that the distribution will continue to rise quarter after quarter for years.
#4: Genesis Energy
Genesis Energy (GEL) is a diversified midstream limited partnership, which generates 42% of its operating income from offshore pipeline transportation, 36% from sodium minerals and sulfur services, 16% from onshore facilities and 6% from marine transportation.
Genesis Energy has spent extensively on growth projects but its performance has been poor. This is clearly reflected in its free cash flows, which have been negative in four out of the last five years.
As a result, the MLP carries a large debt load, with its interest expense currently “eating” almost all its operating income. In order to avoid stretching its balance sheet even further, Genesis Energy has heavily diluted its shareholders in recent years; it has doubled its share count in the last six years and has thus made its distribution burdensome, as the latter is distributed to more units.
However, the unsustainable trend of adding new debt and issuing new shares has probably come to an end, as Genesis Energy slashed its distribution by 31% almost a year ago. While investors are averse of distribution cuts, in this case it marks a turning point. The distribution cut gives Genesis Energy cash flows to use in deleveraging. Moreover, its distribution yield is still attractive, as it currently stands at 8.7%. The partnership’s leverage and financial goals are shown in the image below.
Source: Genesis Energy August 2018 Investor Presentation, slide 30
Genesis Energy will greatly benefit from the rally of the oil price in the last 12 months, which has resulted in an almost 3.5-year high oil price. This rally has led the U.S. oil production to record levels this year while EIA expects the U.S. output to climb to new all-time highs next year.
This trend is prominent in the Gulf of Mexico, where Genesis Energy generates a great portion of its earnings thanks to the services it offers to deep-water oil producers.
Due to its high leverage, Genesis Energy is currently trading at a markedly cheap valuation, with a P/EBITDA ratio around 5.0. However, as the MLP is likely to strengthen its balance sheet, it will probably be rewarded with a richer valuation.
In addition, as Genesis Energy is not likely to cut its distribution again, its shareholders are highly rewarded while waiting for the MLP to strengthen its balance sheet. Overall, thanks to its 8.7% distribution yield and its cheap valuation, Genesis Energy is likely to offer double-digit annual returns in the upcoming years.
#3: Sunoco LP
Sunoco LP (SUN) distributes motor fuel to approximately 9,900 convenience stores, independent dealers, commercial customers and distributors in more than 30 states. It is one of the largest distributors for the Exxon, Chevron and Valero brands.
Sunoco LP operates with a fee-based model, which is intended to provide predictable and reliable cash flows regardless of the gyrations of the price of oil.
Source: Investor Presentation
Thanks to this model, the MLP had raised its distribution for 13 consecutive quarters, until the summer of 2016. However, Sunoco LP greatly increased its leverage while it also quadrupled its share count from 2012 to 2016. Consequently, given also its lackluster free cash flows until last year, its distribution became markedly burdensome. As a result, the MLP has frozen its distribution in the last 9 quarters.
As the current distribution yield is an exceptional 12.1%, the freezing of the distribution is not a problem. The big question is whether a distribution cut is imminent. Thanks to the sale of about 1,110 convenience stores to 7-Eleven for $3.3 B in cash, Sunoco LP managed to drastically reduce its leverage, from 6.0 to 4.5 while it also posted a 1.24 distribution coverage in the last quarter.
Moreover, the MLP will greatly benefit from the positive trends observed in the gasoline market. U.S. gasoline demand climbed to record levels in 2016 and 2017 and is expected to remain strong for the foreseeable future. As the business model of Sunoco LP relies on high volumes, the MLP will greatly benefit from the favorable environment in the years ahead.
Overall, now that Sunoco LP has resolved its debt issue, it is free to reap the full benefit from a favorable gasoline market. Its free cash flows have already improved impressively since last year and are likely to remain strong. Thus, its shareholders are poised to benefit from earnings growth and an exceptional 12.1% distribution, which is not likely to be cut anytime soon.
#2: Suburban Propane Partners
Suburban Propane Partners (SPH) serves the energy needs of approximately one million residential, commercial, industrial and agricultural customers in 41 states. Almost 90% of its revenue comes from the sale of propane.
The results of Suburban are largely determined by factors that are beyond the control of the company. The weather is the most important determinant of its results. Due to warmer than average weather in 2016 and 2017, the earnings of Suburban plunged in these two years. On the other hand, due to fairly cold winter this year, its earnings have rebounded. Moreover, the performance of the company is highly influenced by commodity prices, mostly by the price of propane. Given the impact of weather and the price of propane on the results of Suburban, it is easy to understand why its earnings have been so volatile in the last decade.
The MLP has seriously leveraged its balance sheet in recent years. Its net debt currently stands at $1.5 B, which is about 20 times the earnings of the last 12 months. As a result, the interest expense “eats” about half of operating income. Given also the poor results of Suburban in recent years, it is easy to understand why the MLP was forced to slash its distribution by 32% last year.
Due to the high leverage of Suburban and its lackluster results, the stock is now trading around its 10-year lows, with a markedly low P/EBITDA ratio of 5.5. While we do not recommend this volatile stock as a long-term holding, it now seems to be much closer to the bottom part of its cycle than the top of its cycle.
As a result, whenever a cold winter shows up, the stock is likely to highly reward those who purchase it. Moreover, investors are highly rewarded while waiting for the favorable scenario to play out, as the stock is offering a 10.6% distribution, which is not likely to be cut again for the foreseeable future.
#1: Buckeye Partners
Buckeye Partners (BPL) operates a diversified network of assets that offer midstream logistic solutions. The MLP generates about 2/3 of its operating income from its domestic pipelines and terminals and the other 1/3 from its global marine terminals.
Source: Investor Presentation
More than 95% of the adjusted EBITDA of BPL is fee-based. Thanks to this fee-based model, BPL is resistant to the fluctuations in the prices of oil and refined products. This was prominent when the price of oil began to collapse in 2014. The earnings of most MLPs plunged but the earnings-per-share of BPL have increased 20% since then.
BPL made a major acquisition last year, when it purchased a 50% stake in VTTI, one of the largest independent global marine terminal companies. As VTTI has a fee-based model, it is a great fit to the portfolio of BPL. In addition, thanks to its ongoing growth projects, VTTI is expected to be a growth driver for BPL in the upcoming years.
On the other hand, BPL has diluted its shareholders at an extreme rate in recent years, as it has increased its share count by 69% since 2011. Management has pursued such a policy in order to avoid stretching the already weak balance sheet but the issuance of plenty of new shares has greatly increased the financial burden of the distribution . While the distribution per share has increased 25% since 2011, the annual amount spent on distributions has almost doubled.
In the recent conference call, management mentioned this challenge and stated that it would examine its options in order to identify the most shareholder-friendly way to fund the growth projects. Investors should take note of this challenge and realize that the distribution may be cut.
In fact, the market expects a distribution cut, as it has beaten the stock to such a point that it currently offers a 14.2% distribution yield. On the other hand, while the distribution may be cut, such a scenario should not be viewed as a disaster. The distribution yield will probably remain attractive while BPL will continue to grow its earnings and have greater financial flexibility. Moreover, the stock is trading at a P/EBITDA ratio of 5.2, which is very cheap.
Overall, thanks to its 50% plunge in the last two years, BPL has entered bargain territory. As a result, it is likely to offer double-digit total annual returns over the next few years even if it has to cut its extremely generous distribution.
MLP ETFs, ETNs, & Mutual Funds
There are 3 primary ways to invest in MLPs:
- By investing in units of individual publicly traded MLPs
- By investing in a MLP ETF or mutual fund
- By investing in a MLP ETN
Note: ETN stands for ‘exchange traded note’
The difference between investing directly in a company (normal stock investing) versus investing in a mutual fund or ETF is very clear. It is simply investing in one security versus a group of securities.
ETNs are different. Unlike mutual funds or ETFs, ETNs don’t actually own any underlying shares or units of real businesses. Instead, ETNs are financial instruments backed by the financial institution (typically a large bank) that issued them. They perfectly track the value of an index. The disadvantage to ETNs is that they expose investors to the possibility of a total loss if the backing institution were to go bankrupt.
With that said, the 5 largest MLP ETFs, mutual funds, and ETNs based on market cap are below:
- ALS Alerian MLP Infrastructure Index (AMLP) – ETF with a market value of $10.2 billion, 0.85% expense ratio
- J.P. Morgan Alerian MLP Index ETN (AMJ) – ETN with a market value of $3.4 billion, 0.85% expense ratio
- Tortoise MLP & Pipeline Fund (TORIX) – Mutual fund with assets of $4.3 billion, 0.96% expense ratio
- SteelPath MLP Income Fund (MLPDX) – Mutual fund with assets of $3.5 billion, 1.11% expense ratio
- SteelPath MLP Select 40 Fund (MLPTX) – Mutual fund with assets of $3.6 billion, 0.86% expense ratio
The advantage to investing in a MLP ETN is that distribution income is tracked, but paid via a 1099. This eliminates the tax disadvantages of MLPs (no K-1s, UBTI, etc.). This unique feature may appeal to investors who don’t want to hassle with a more complicated tax situation. The J.P. Morgan Alerian MLP ETN makes a good choice in this case.
At Sure Dividend, we prefer investing directly into individual securities (like one or more of the 10 highest ranked MLPs in this article) rather than into funds. That’s because this gives us the flexibility to invest in our best ideas and create a portfolio that matches the individual needs of each investor.
With that said, our favorite choice for simplicity from the above 5 basket approaches to investing in MLPs is the ALS Alerian MLP Infrastructure Index (AMLP) for its lower fees and greater size. The J.P. Morgan Alerian MLP Index ETN is another viable choice for investors looking for less tax complications with a bit more counter-party risk.
In the final analysis, none of the above funds score particularly well for low fees. All have expense ratios fairly close to 1%, which is relatively high. Thought of another way, an annual expense of 1% is equivalent to 20% of your income on a fund with a 5% yield.
Master Limited Partnerships are a misunderstood asset class. They offer diversification, tax-advantaged and tax-deferred income, high yields, and have historically generated excellent total returns.
The asset class is likely under-appreciated because of its more complicated tax status, and because it is relatively new. The first MLP was created in 1981, so they are still a relatively new investment form.