Updated on January 14th, 2020 by Bob Ciura
Spreadsheet data updated daily
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.
Since MLPs widely offer high yields, they are naturally appealing for income investors. With this in mind, we created a full downloadable list of all MLPs in our coverage universe.
You can access the spreadsheet by clicking on the link below:
This comprehensive article covers MLPs in depth, including the history of MLPs, unique tax consequences and risk factors of MLPs, as well as our top-ranked MLPs today.
The table of contents below allows for easy navigation of the article:
Table of Contents
- The Complete List of MLPs
- The History of Master Limited Partnerships
- MLP Tax Consequences
- Advantages & Disadvantages of Investing in MLPs
- The 9 Best MLPs Today
#9: Brookfield Renewable Partners (BEP)
#8: NextEra Energy Partners (NEP)
#7: Brookfield Infrastructure Partners (BIP)
#6: Magellan Midstream Partners (MMP)
#5: Sunoco LP (SUN)
#4: Enterprise Products Partners (EPD)
#3: MPLX LP (MPLX)
#2: Energy Transfer LP (ET)
#1: Genesis Energy LP (GEL)
- MLP ETFs, ETNs, & Mutual Funds
- Final Thoughts
The Complete List of MLPs
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.
4 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.
Advantages of 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.
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 ~1.9%, while the Alerian MLP ETF (AMLP) yields nearly 9%. Many individual MLPs have yields above 10%.
Disadvantages of MLPs
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 9 Best MLPs Today
- Return from change in valuation multiple
- Return from distribution yield
- Return from growth on a per-unit basis
The top MLPs list was screened further on a qualitative assessment of a company’s dividend risk. Specifically, MLPs with a Dividend Risk score of ‘F’ according to the Sure Analysis Research Database were omitted from the list.
Continue reading for detailed analysis on each of our top MLPs by expected annual returns, ranked in order of lowest to highest.
MLP #9: Brookfield Renewable Partners (BEP)
- Expected 5-Year Annual Returns: 4.5%
Brookfield Renewable Partners L.P. operates one of the world’s largest portfolios of publicly-traded renewable power assets. Its portfolio consists of over 17,000 megawatts of capacity and 880 generating facilities in North America, South America, Europe, and Asia.
Source: Investor Presentation
Brookfield Renewable Partners is one of four publicly-traded listed partnerships that are operated by Brookfield Asset Management (BAM). The others are Brookfield Property Partners (BPY), Brookfield Infrastructure Partners (BIP), and Brookfield Business Partners (BBU).
Brookfield Energy Partners trades with a market capitalization of US$15 billion and is cross-listed on the New York Stock Exchange and the Toronto Stock Exchange, where it trades under the tickers ‘BEP’ and ‘BEP.UN’, respectively.
In mid-November, Brookfield Renewable Partners reported (11/11/19) financial results for the third quarter of fiscal 2019. The company’s share of actual generation fell 6.1% while its long-term average generation capability (which represents how much electricity would be generated if all of the company’s assets generated electricity at their long-term average levels) decreased -2.3% due to asset sales. The company sold two mature European wind portfolios for $186 million and achieved an 18% compounded annual return since acquisition.
Normalized funds from operations per unit increased 30%, from $0.33 in last year’s quarter to $0.43, thanks to the contribution from recent acquisitions. Management announced its plan to create a Canadian corporation in order to enhance the liquidity of the stock. More precisely, it will distribute class A shares of the new corporation, Brookfield Renewable Corporation, to existing unitholders. From an economic and accounting perspective, the transaction will be similar to a unit split.
We expect Brookfield Renewable Partners to continue growing funds from operations at a meaningful pace via its heavy investing in new projects. The company recently announced its investment in a joint venture of a global solar developer with more than 6,500 megawatts of solar power.
Growth could also be boosted by a potential acquisition. On January 13th, Brookfield offered to acquire the remaining 38% of Terraform Power (TERP) that it does not already own.
Overall, we expect total returns of 4.5% per year, essentially consisting of the current 4.5% dividend yield. Forecasted FFO growth of 6% is expected to be offset by a similar reduction in the P/FFO multiple, as we view the stock as overvalued today.
MLP #8: NextEra Energy Partners (NEP)
- Expected 5-Year Annual Returns: 6.7%
NextEra Energy Partners was formed in 2014 as Delaware Limited Partnership by NextEra Energy to own, operate, and acquire contracted clean energy projects with stable, long-term cash flows. The company’s strategy is to capitalize on the energy industry’s favorable trends in North America of clean energy projects replacing uneconomical projects.
At year-end 2018, NextEra Energy Partners operated 34 contracted renewable generation assets consisting of wind and solar projects in 12 states. The company also operates contracted natural gas pipelines in Texas, which accounted for 18% of NextEra Energy Partners income in 2018.
NextEra Energy (NEE), which owns approximately 83% of NextEra Energy Partners, has an impressive history of generating steady growth. From 2003 through 2018, NextEra Energy grew adjusted earnings-per-share and dividends by 7.8% and 9.1% per year, respectively.
Source: Investor Presentation
We believe this is a promising baseline for NextEra Energy Partners. On October 22nd, the company reported third-quarter financial results which showed adjusted EBITDA and cash-available-for-distribution (CAFD) growth of 55% and 81%, respectively, on a year-over-year basis.
Further growth is likely, due to organic growth opportunities as well as acquisition activity. On the latter front, last quarter the company announced it will acquire Meade Pipeline Co LLC in a transaction valued at approximately $1.37 billion.
Meade Pipeline owns a 39.2% interest in the Central Penn Line, a 185-mile intrastate natural gas pipeline which supplies natural gas from the Marcellus region to various parts of the Mid-Atlantic and Southeastern regions of the U.S. The pipeline has capacity for 1.7 billion cubic feet of natural gas per day.
We expect growth from further expansion in renewable energy sales and addition of new infrastructure to drive an average annual growth rate of 4% throughout the next half decade to 2025.
Overall, we expect total annual returns close to 7% for NextEra, consisting of 4% annual book-value-per-unit growth, the 3.7% current distribution yield, partially offset by a small negative return of ~0.7% per year from a declining valuation multiple.
MLP #7: Brookfield Infrastructure Partners (BIP)
- Expected 5-year Annual Returns: 9.5%
Brookfield Infrastructure Partners is one of the largest global owners and operators of infrastructure networks, which includes operations in sectors such as energy, water, freight, passengers, and data. Brookfield Infrastructure Partners is one of four publicly-traded listed partnerships that is operated by Brookfield Asset Management (BAM). Brookfield Infrastructure Partners trades with a market capitalization of $15 billion.
Brookfield Infrastructure Partners reported its third-quarter results on November 7th. The company reported revenues of $1.66 billion for the quarter, which was 43% higher than the same period a year ago. The strong revenue growth was due to a large increase in Brookfield Infrastructure Partners’ asset base from acquisitions as well as organic growth. In Q3, Brookfield Infrastructure generated funds-from-operations per unit (FFOPS) of $0.82, 15% higher than a year ago. Year-to-date, FFOPS is $2.55, up 10.4% year-over-year.
We raised our 2019 estimate by 1.5% due to strong year-to-date results. The company continued to expand its diversified portfolio of quality infrastructure assets. In the past few months, alongside institutional partners, it closed the acquisitions of a North American gas pipeline business (BIP’s share was a $140 million investment) and a New Zealand data distribution business ($200 million).
Going forward, BIP will likely continue to deliver attractive FFOPS growth. Over the last five years, the growth rate was on average 8.3% annually. Future asset sales and the redeployment of that capital are expected to generate unitholder value over time. For example, in the coming months, BIP expects to further invest $1.1 billion across various businesses including a North American rail business and Indian telecom towers.
It also expects to generate after-tax proceeds of $550 million on the sale of three assets with two of the assets having after-tax annualized returns of 16% or higher. BIP has capital recycling initiatives that aim to generate a total of $1.5-2 billion over the next 12 months.
Shareholder returns will be driven in part by FFO and dividends. We expect 8.5% FFO growth, while the MLP also offers a 4% yield. As the payout ratio is estimated to be about ~60% this year, the cash distribution is very safe. What adds to BIP’s dividend safety is that its FFO is very stable.
Since 2012, FFOPS has remained stable or has steadily increased every year. The infrastructure that the company provides is needed during recessions as well, which is why FFO would likely remain relatively stable during a downturn or economic crisis. BIP also maintains a solid credit rating of BBB+.
However, the stock is overvalued. BIP currently trades for a P/FFO ratio of 15, compared with our fair value estimate of 13. A declining valuation multiple could reduce annual returns by ~3%, leading to total expected returns of 9.5% per year through 2025.
Still, total returns are expected to nearly reach double-digits, which earns the stock a buy rating from Sure Dividend.
MLP #6: Magellan Midstream Partners (MMP)
- Expected 5-year Annual Returns: 11.5%
Magellan Midstream Partners has the longest pipeline system of refined products in the U.S., which is linked to nearly half of the total U.S. refining capacity. Its network of assets includes 9,700 miles of pipeline, 53 storage terminals, and 45 million barrels of storage capacity.
Refined products generate approximately 59% of its total operating income while crude oil and marine storage represents the remaining 41%. Magellan has a market capitalization above $14 billion.
Source: Investor Presentation
In late October, Magellan reported third quarter results including operating profit growth of 12% in refined products and 1% growth in crude oil and marine storage. Adjusted earnings-per-share and distributable cash flow increased 13% and 9%, respectively, due to higher shipments of refined products and a higher average transportation rate.
Magellan’s extensive and diversified network of pipeline and storage assets is a significant competitive advantage. Another competitive advantage is its fee-based model in which the company generates fees based on volumes transported and stored and not on the underlying commodity price. This helps insulate Magellan from sharp declines in commodity prices. Only ~10% of its operating income depends on commodity prices.
Magellan has promising growth prospects in the years ahead, as it has several growth projects under way. During the last decade, the company invested $5.4 billion in growth projects and acquisitions and has exhibited much better performance than the vast majority of MLPs.
The company will invest $1.0 billion in these projects this year and $400 million in 2020. It also has more than $500 million of potential growth projects under consideration and continues to evaluate their prospects in order to identify the most promising ones. Magellan has grown its cash flow per share at a 4.5% average annual rate in the last decade, which includes the Great Recession.
Magellan has an excellent track record of steadily growing its distribution, and strong distribution safety. Magellan has increased its distribution 70 times since its initial public offering in 2001. The company expects to maintain a distribution coverage ratio of at least 1.2x over the next several years, which will be sufficient to raise the payout each year. Magellan also has a strong debt profile, with a leverage ratio of 2.8x, and a high credit rating of BBB+ from Standard & Poor’s.
We expect total annual returns of 11.5% through 2025, consisting of 5% annual cash flow growth, the 6.2% distribution yield, and a small 0.3% annual boost from a rising valuation multiple.
MLP #5: Sunoco LP (SUN)
- Expected 5-year Annual Returns: 12.0%
Sunoco distributes fuel products through its wholesale and retail business units. The wholesale unit purchases fuel products from refiners and sells those products to both its own and independently-owned dealers. Meanwhile, the retail unit operates stores where fuel products as well as other items such as convenience products and food are sold.
Sunoco was founded in 2012, and currently trades with a market capitalization of $2.6 billion.
Source: Investor Presentation
Sunoco reported its third-quarter earnings results on November 6th. Adjusted EBITDA and distributable cash flow declined 7.7% and 11%, respectively, compared with the same quarter last year. Excluding a one-time cash benefit of $25 million, adjusted EBITDA and distributable cash flow would have grown by a small amount. Growth was driven by record fuel volumes of 2.11 billion.
Sunoco reported current quarter cash coverage of 1.55x, and trailing twelve month coverage of 1.30x, which indicates a secure distribution. At the same time, investors should keep a close eye on the company’s debt levels, as Sunoco ended the quarter with a leverage ratio of net debt to adjusted EBITDA, of 4.51x.
Sunoco does not have a long history, and its results have varied significantly in the past few years. Going forward, Sunoco can generate growth through multiple factors. Following the sale of a large amount of its convenience stores, Sunoco is now more dependent on its fuel wholesale business, where it profits from significant scale and revenue consistency.
In Texas, Sunoco is one of the largest independent fuel distributors, and Sunoco is also among the top distributors of Chevron, Exxon, and Valero-branded motor fuel in the rest of the United States. In the fuel wholesale industry, scale is important, as increased scale allows for higher margins and a better negotiating position with both suppliers and customers. Total gasoline sales declined relatively steadily since the beginning of the current millennium, but bottomed in 2015 and started to rise again over the last three years.
This macro shift towards higher gasoline consumption, can be explained by customers’ preference for larger, less efficient models such as SUVs and trucks. Higher gasoline demand is a macro tailwind for Sunoco’s business.
Sunoco is expected to generate EBITDA-per-unit of $7.20 in 2019; with a P/EBITDA of 4.4x, units trade just slightly below our fair value target of 4.5x. Overall, we expect annual returns slightly above 12% per year, fueled mostly by the current yield of 10.5%, as well as 1.5% EBITDA-per-unit growth, and a minor boost from an expanding P/EBITDA multiple.
MLP #4: Enterprise Products Partners (EPD)
- Expected 5-year Annual Returns: 12.7%
Enterprise Products Partners was founded in 1968. It is structured as a Master Limited Partnership, or MLP, and operates as an oil and gas storage and transportation company.
Enterprise Products has a tremendous asset base which consists of nearly 50,000 miles of natural gas, natural gas liquids, crude oil, and refined products pipelines. It also has storage capacity of more than 250 million barrels. These assets collect fees based on materials transported and stored.
Source: Investor Presentation
On 10/28/19, Enterprise Products reported third-quarter 2019 financial results. Distributable cash flow increased 4.7% to $1.64 billion. This enabled Enterprise to achieve 1.7x distribution coverage for the third quarter, and retain significant cash flow for growth capex.
Enterprise has positive growth potential moving forward, thanks to new projects and exports. For example, Enterprise announced that it exported the first cargo of ethylene from Morgan’s Point, where it has a 50% interest. The new terminal has the capacity to load 2.2 billion pounds per year of ethylene. The new terminal is connected via pipeline to its Mont Belvieu complex.
Enterprise Products has started construction of the Mentone cryogenic natural gas processing plant in Texas, which will have the capacity to process 300 million cubic feet per day of natural gas and extract more than 40,000 barrels per day of natural gas liquids. The facility is expected to begin service in the first quarter of 2020.
Enterprise Products is also developing the Shin Oak NGL Pipeline, which is scheduled to be placed into service next year. The Shin Oak NGL Pipeline is expected to have total capacity of 600,000 barrels per day. Exports are also a key growth catalyst. Demand for liquefied petroleum gas and liquefied natural gas, or LPG and LNG respectively, is growing at a high rate across the world, particularly in Asia.
In terms of safety, Enterprise Products Partners is one of the strongest midstream MLPs. It has credit ratings of BBB+ from Standard & Poor’s and Baa1 from Moody’s, which are higher ratings than most MLPs. Enterprise Products’ high-quality assets generate strong cash flow, even in recessions. As a result, Enterprise Products has increased its distribution to unitholders for 62 quarters in a row.
We expect total annual returns of 13.7% through 2025, consisting of 4% annual DCF growth, the 6.2% distribution yield, and a 3.5% annual tailwind from valuation expansion.
MLP #3: MPLX LP (MPLX)
- Expected 5-year Annual Returns: 15.8%
MPLX, LP is a master limited partnership that was formed by the Marathon Petroleum Corporation (MPC) in 2012. The business operates in two segments: Logistics and Storage – which relates to crude oil and refined petroleum products – and Gathering and Processing – which relates to natural gas and natural gas liquids (NGLs). The $26 billion limited partner generated $2.7 billion in distributable cash flow in 2018.
On July 30th, 2019 MPLX completed the acquisition of Andeavor Logistics LP. On October 25th, 2019 MPLX announced a 6.3% year-over-year quarterly distribution increase to $0.6775 per unit, equating to $2.71 on an annual basis. This marks the 27th consecutive quarterly distribution increase from the company.
On October 31st, 2019 MPLX released Q3 2019 results for the period ending September 30th, 2019. For the quarter Net Income equaled $629 million, compared to $510 million previously. Distributable Cash Flow (DCF) equaled $1.027 billion (~$1.05 per unit) compared to $766 million (~$0.96 per unit) in Q3 2018.
MPLX ended the quarter with an adjusted distribution covered ratio of 1.42x and a consolidated debt to adjusted EBITDA ratio of 4.0x compared to 3.8x in Q3 2018.
MPLX has positive growth prospects, due primarily to its projects currently under development.
Source: Earnings Slides
Pipelines tend to have a stronghold in terms of extracting economic rents, and natural gas is cleaner than coal. In the last decade, natural gas has overtaken coal as the leading source of electricity generation in the U.S. Building pipelines requires years of approvals and ongoing regulation.
As such, pipeline firms enjoy “toll-booth” type business models, with a good portion of their revenue fixed via fee-based and “take or pay” agreements. MPLX in particular has a strong position in the Marcellus / Utica region, with long-term contracts from Marathon.
We expect total annual returns of 15.8% through 2025, consisting of 3% annual cash flow per share growth, the 9.8% dividend yield, and a 3% annual tailwind from valuation expansion.
MLP #2: Energy Transfer (ET)
- Expected 5-year Annual Returns: 17.2%
Energy Transfer is a midstream oil and gas Master Limited Partnership, or MLP. Energy Transfer’s business model is storage and transportation of oil and gas. Its assets have total gathering capacity of nearly 13 million Btu/day of gas, and a transportation capacity of 22 million Btu/day of natural gas and over 4 million barrels per day of oil.
Energy Transfer’s diversified and fee-based assets provide the company with steady cash flow, even when oil and gas prices decline. As a midstream operator, Energy Transfer’s cash flow relies heavily upon volumes, and less so on commodity prices.
Source: Investor Presentation
ET reported 2019 third-quarter results in November. Adjusted EBITDA continued its streak of strong growth on the back of another record operating performance in the Partnership’s NGL and refined products segment, increasing 8% year-over-year to $2.79 billion.
Distributable cash flow increased by an even greater amount at 10% to $1.52 billion, reflecting improving cash flow generation efficiencies. This led to $712 million in retained cash flow and a 1.88x distribution coverage ratio, making the company’s double-digit yield very safe. The company also continued to improve its balance sheet, with $3.32 billion of liquidity and a credit agreement leverage ratio of 3.63.
The company is also making strong progress on several growth projects which should be adding to cash flows in the coming quarters and years. For example, Energy Transfer announced it will construct a seventh natural gas liquids (NGL) fractionation facility at Mont Belvieu, Texas, with 150,000 barrels per day of capacity. Fractionator VII is scheduled to be operational in the first quarter of 2020 and is fully subscribed by multiple long-term contracts.
The company is also progressing with plans on a Bakken pipeline optimization project, which is expected to start up in 2020.
Energy Transfer also announced its acquisition of SemGroup in a $5 billion deal. The company is confident the acquisition will meaningfully add to its future growth. The acquisition will expand its crude oil transportation, terminal and export capabilities with the addition of 18.2 million barrels of crude oil storage capacity.
Source: Investor Presentation
The company’s new projects will help secure its attractive distribution, which currently yields 9%. Energy Transfer anticipates a distribution coverage ratio of ~1.7x to ~1.9x for 2019, which is better than average for an MLP.
We expect total annual returns of 17.2% through 2025, consisting of 3% annual DCF growth, the 9% dividend yield, and a sizable 5.2% annual tailwind from valuation expansion.
MLP #1: Genesis Energy LP (GEL)
- Expected 5-year Annual Returns: 18.8%
Genesis Energy is a diversified midstream energy 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. It has a market capitalization of $2.5 billion.
Source: Investor Presentation
In the most recent quarter, cash flows from operating activities declined 13% from the same quarter last year. The company generated cash before reserves to common unitholders of $82.5 million which represented distribution coverage of 1.22x for the quarter. Flows from Operating Activities of $136.1 million for the third quarter of 2019 compared to $156.7 million for the same period in 2018. Genesis ended the quarter with a leverage ratio of 4.91x.
While Genesis Energy operates primarily with a fee-based model, its earnings are not resilient. In our view, the MLP invested too heavily and increased its leverage too much in the past.
In response, Genesis Energy now intends to reduce its leverage ratio from 5.0x to about 4.0x in the upcoming years. Moreover, U.S. oil production has reached record levels and is expected by the Energy Information Administration to keep posting new all-time highs in the upcoming years. This oil boom will be prominent in the Gulf of Mexico, where Genesis Energy generates a great portion of its earnings thanks to the services it provides to deep-water oil producers.
We expect total annual returns of 18.8% through 2025, consisting primarily of 5% annual EBITDA-per-unit growth and the 10.4% yield, with a 3.4% annual tailwind from valuation expansion.
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.
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.
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.
MLPs are generally attractive for income investors, due to their high yields. As always, investors need to conduct their own due diligence regarding the unique tax effects and risk factors before purchasing MLPs. That said, the MLPs on this list could be a good place to start.