The MLP sector has significantly underperformed the broader stock market over the last several years.
This is primarily due to the precipitous drop in oil prices that started in 2014. The vast majority of master limited partnerships are concentrated in the energy space, specifically midstream energy (pipelines).
However, we believe there's a lot to like about MLPs today. Oil prices have rebounded this year.
Moreover, MLPs are still tremendously undervalued, and valuation expansion should significantly boost their future returns. Lastly, MLP distributions are tax-advantaged and avoid the double-taxation that common stock dividends incur.
Clearly, there is something to be said for combing the MLP universe for investment opportunities. There are three undervalued MLPs that look attractive today.
Buckeye Partners (BPL)
Buckeye Partners is an energy MLP that owns and operates a diversified network of midstream assets. The partnership operates approximately 6,000 miles of pipelines and more than 135 liquid petroleum terminals with over 176 million barrels of total storage capacity. Buckeye Partners generates about two-third of its operating income from its domestic pipelines and terminals unit, and the remaining one-third from its global marine terminals business. More than 95% of Buckeye's EBITDA is fee-based, which reduces its reliance on commodity prices.
Buckeye's stock price has been pummeled over the last year, declining by approximately 45%. We believe that this reaction has been significantly overblown. The company is one of the largest in the MLP space (with a market capitalization of $5.4 billion) and trades with an absurdly high dividend yield of 13.9%.
Whenever a company's dividend yield reaches such a high level, investors must perform serious due diligence to measure the safety of the dividend payment. Importantly, Buckeye tends to operate with a distribution-coverage ratio above 1.0, although recent equity issuances to fund capital projects have lowered this figure. Buckeye is expecting to report a distribution coverage ratio between 0.9 and 0.95. Still, Buckeye's Chief Executive Officer recently stated "our board of directors remain committed to our current distribution policy," and "we have no intention of cutting Buckeye's distribution." We believe the partnership will return to full distribution coverage in the near future.
In the meanwhile, Buckeye's business should continue to grow at a satisfactory rate. Buckeye's growth strategy is largely acquisition-based. Over the last eight years, it has acquired more than 75 domestic and international terminals through more than $8 billion of aggregate purchases. Most recently, Buckeye made a major acquisition last year with the purchase of a 50% stake in VTTI, one of the largest independent global marine terminal companies. Organic opportunities are also plentiful; as an example, Buckeye's South Texas Gateway project (set for completion in 2019) calls for the construction of a 600-mile long-haul pipeline with total expected capacity of approximately 400,000 barrels per day.
For income-seeking investors, Buckeye Partners approximately 14% yield is extremely attractive and safe for the foreseeable future. But we caution that because of the lack of current distribution coverage, investors ought to watch the business' fundamental performance very closely if they initiate a stake in this midstream MLP.
Read what Real Money's Paul Price thinks about Buckeye Partners here.
Enterprise Products Partners (EPD)
Enterprise Products Partners is an oil-and-gas master limited partnership and the largest MLP by market capitalization. The partnership operates storage and transportation assets, including nearly 50,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines. Enterprise Products Partners also operates approximately 250 million barrels of oil storage capacity.
Enterprise Products Partners is known for being one of the safest MLPs in the investable universe. The partnership has an investment-grade BBB+ rating from Standard & Poor's, and a similar Baa1 rating from Moody's. In addition, Enterprise Products Partners has a reputation for being exceptionally well-managed. This year's ranking marked the second consecutive year in which the partnership won the unanimous vote for the Institutional Investor All-America Executive Team for the MLP sector.
From a distribution safety perspective, Enterprise Products Partners is similarly appealing. The partnership reported a distribution coverage ratio of 1.5x in the most recent quarter. Moreover, the partnership has increased its distribution for 55 consecutive quarters and 64 times since its initial public offering in 1998. EPD has a 5.8% dividend yield. For these reasons, we believe the Enterprise Products Partners is one of the best options for conservative investors looking to add some MLP exposure to their investment portfolios.
Energy Transfer Partners (ETP)
Energy Transfer Partners is the second-largest energy MLP based on market capitalization, behind only Enterprise Products Partners. The partnership operates more than 71,000 miles of natural gas, natural gas liquids, and crude and refined products pipelines. Energy Transfer Partners is a primary operator and financier of the notable Rover and Dakota Access Pipeline projects (DAPL).
Energy Transfer Partners is currently in the midst of an aggressive period of capital investment. As an example, the partnership owns 33% of the notable Rover pipeline, which is now capable of transporting more than 1.6 billion cubic feet of petroleum products each day. Separately, Energy Transfer Partners' Red Bluff Express pipeline (set to come online this quarter) will have a capacity of at least 1.4 billion cubic feet per day. All said, Energy Transfer Partners has approximately $10 billion worth of new projects coming online from mid-2017 to mid-2019 that should bolster its growth for the foreseeable future.
Like the other securities above, what immediately stands out about Energy Transfer Partners is the partnership's exceptionally high yield. Energy Transfer Partners trades with a distribution yield of around 11.7%. Fortunately, its current distribution payment is well-covered by cash flows. The partnership reported a distribution coverage ratio of 1.15x in the most recent quarter. Prior to that, the partnership's distribution coverage ratio for the fourth quarter of 2017 was 1.30x.
To conclude, Energy Transfer Partners offers a very compelling mix of yield (11.7%) and safety (distribution coverage ratio above 1.0x) for income-seeking investors.
-- By Nick McCullum
McCullum is president at Sure Dividend LLC. You can find the full list of high-yield MLPs compiled by Sure Dividend here.
(This article was sent June 5 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this from Robert Powell, Peter Tchir, Jonathan Heller and others.)
