Investors looking for high levels of income generally go for asset classes such as real estate investment trusts, or REITs, consumer staples stocks, or utilities. However, master limited partnerships, or MLPs, can offer much higher levels than other market sectors, making them attractive income securities.
MLPs generally own energy assets such as oil or gas pipelines and storage terminals. That makes their income fairly predictable in most circumstances, and affords them the ability to generate high yields for investors.
These three MLPs have very high yields and reliable payouts.
Every Investor's All American
Plains All American Pipeline, L.P. (PAA) is a midstream energy infrastructure provider. The company owns an extensive network of pipeline transportation, terminals, storage, and gathering assets in key crude oil and natural gas liquids-producing basins at major market hubs in the United States and Canada. On average, it handles more than 7 million barrels per day of crude oil and NGL through 18,370 miles of active pipelines and gathering systems. Plains All American generates around $40 billion in annual revenues.
In the 2022 first quarter, revenues came in at $12.3 billion, while adjusted EBITDA from crude oil increased 14% year over year. Growth was primarily due to higher pipeline volumes, partially offset by higher operating expenses linked to these increased volumes and utility costs. Adjusted EBITDA from NGL increased 19% year over year, primarily due to the favorable impact of higher sales volumes at higher realized margins. Adjusted EBITDA totaled $715 million for the quarter, up 16% compared to Q1 2022.
Distributable cash flows (DCF) grew 11% to $0.62 on a per-unit basis. Unit repurchases over the past year boosted this figure. Management affirmed its full-year 2023 guidance, expecting adjusted EBITDA to be between $2.45 billion and $2.55 billion.
Plains All American has a number of minimum volume commitment contracts that support relatively stable revenues in its pipelines (transportation) segment. These contracts have an average remaining term of around five years.
We currently expect DCFU growth of 5% in the medium-term, powered by an improving outlook in the energy sector. Beyond 2023, management anticipates targeting annualized common distribution increases of approximately $0.15 per unit each year until reaching a targeted unit distribution coverage ratio of approximately 160%.
PAA units currently yield 8%.
A Holly, Jolly Dividend Yield
Holly Energy Partners (HEP) owns and operates petroleum product and crude pipelines, storage facilities, distribution terminals, and refinery processors in the U.S. Through its two segments, the partnership transports various gasoline products, distillates, and crude oil. It operates 26 pipelines, 11 terminals, and 5 refinery processing units.
On March 14, 2022, HEP acquired the pipelines and terminal assets of Sinclair Transportation. The deal included 1,200 miles of pipelines of crude oil and products, eight product terminals and two crude terminals. HEP paid $325 million and issued 21 million of common units to pay for the deal, which was valued at $758 million.
In early May, HEP reported financial results for the first quarter of fiscal 2023. Distributable cash flow (DCF) grew 30% over last year's quarter thanks to higher volumes, which resulted from the takeover of Sinclair Transportation.
HEP achieves growth thanks to contractual tariff escalators, which raise the fees it charges to its customers over time, and the addition of new pipelines. HEP has more than 800 miles of crude oil gathering facilities in the Permian Basin and can continue leveraging its footprint in this area for years.
HEP is one of the most resilient MLPs thanks to its robust business model. About 80% of its minimum-volume contracts with its customers expire after 2024 and the average duration of its contracts with HF Sinclair is 10-15 years.
HEP has fully recovered from the pandemic and now has a healthy distribution coverage ratio of 1.9. This prompted the company to increase its distribution by 29% on May 4, 2022.
HEP units currently yield 8.3%.
A Quarter Century of Distribution Raises
Enterprise Products Partners L.P. (EPD) was founded in 1968. It is structured as a 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.
In the first quarter, the company's revenue amounted to $12.44 billion, a decrease of 4.3% compared to the previous year. Distributable cash flow saw a 5.5% increase, reaching $1.9 billion in the first quarter of 2023 compared to $1.8 billion in the same period in 2022. Adjusted cash flow from operations remained steady at $2.0 billion for both the first quarters of 2023 and 2022, with $8.2 billion recorded for the 12 months ending March 31, 2023. Adjusted free cash flow for the 12 months ending March 31, 2023, was $5.9 billion.
Enterprise has positive growth potential moving forward, thanks to new projects and exports. It has several billion dollars' worth of major capital projects currently under construction. They expect all of these projects to come online in the coming years, boosting cash flows. 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. It also has a distribution coverage ratio of nearly 2x, leaving room for distribution increases and unit repurchases. Enterprise Products' high-quality assets generate strong cash flow, even in recessions.
As a result, Enterprise Products has been able to raise its distribution to unitholders for 25 years in a row.
EPD units currently yield 7.5%.
