As Oil Pumps Higher, Check Out These 3 High-Yield MLPs

As oil prices have soared in recent weeks -- and now exceed $110 per barrel in the U.S. -- investors can find energy stocks with high yields among the Master Limited Partnerships, or MLPs. We found the following three MLPs that have high yields above 5% and strong business models. They should also be able to raise their distributions going forward with supportive commodity prices. To the Letter: MPLX MPLX operates in two segments: logistics and storage, and gathering and processing. The first segment relates to crude oil and refined petroleum products, and the second relates to natural gas and natural gas liquids (NGLs). MPLX on Nov. 2, 2021, announced a quarterly distribution of $0.705 per unit, which marks a 2.5% increase after paying the same $0.6875 distribution for seven quarters. In addition, MPLX announced a special distribution of $0.575, which was paid in the fourth quarter of 2021. In early May, MPLX reported financial results for the first quarter of fiscal 2022, showing net income and distributable cash flow (DCF) per share grew 12% and 8%, respectively, over the prior year's quarter. The strong performance resulted from 4% volume growth in logistics and storage, higher NGL prices and higher volumes in gathering and processing. MPLX maintained a healthy consolidated debt to adjusted earnings before interest, taxes, depreciation, and amortization ratio of 3.7-times and a solid distribution coverage ratio of 1.65. MPLX's industry generally holds competitive advantages as a result of the toll-booth model of pipelines. While growth potential may be limited, the need for the company's infrastructure is certainly present. With MPLX in particular we are encouraged by the company self-funding on the equity side and getting rid of the IDRs. In the last five years MPLX has had distribution coverage ratios of 1.28-times, 1.36-times, 1.51-times, 1.46-times and 1.64-times. Meanwhile, the company's total debt to adjusted earnings before interest, taxes, depreciation, and amortization has been 3.7-times, 3.9-times, 4.1-times, 3.9-times and 3.7-times during the same time period (generally MLP's are shooting for a ratio under 5-times). In addition, the revenues of MPLX are reliable thanks to the long-term contracts with parent company Marathon. Overall, the 9.7% distribution yield of MPLX is safe for the foreseeable future. Pep Up With HEP Holly Energy Partners is responsible for transporting and storing crude oil and refined products. The company operates its own crude oil and petroleum pipelines and storage terminals in 10 U.S. states, including Texas, Nevada and Washington. HEP also has refinery facilities in Utah and Kansas. Nearly all the revenues of HEP are fee-based. Thus, these revenues are hardly affected by 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. As a result, in the downturn of the oil market during 2014-2017, while other MLPs saw their earnings collapse, HEP grew its earnings-pershare and its distributable cash flow per share by 76% and 52%, respectively. HEP in March completed the acquisition of the pipelines and terminal assets of Sinclair Transportation. The deal includes 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 is valued at $758 million. In early May, HEP reported financial results for the first quarter of fiscal 2022, showing distributable cash flow (DCF) dipped 12% over the prior year's quarter due to increased maintenance expenses and exceptionally high revenues in the prior year's period. Due to the pandemic, HEP cut its quarterly distribution by -48% in 2020, from $0.69 to $0.35, after 60 consecutive quarters without a cut. However, HEP has recovered strongly from the pandemic, with its current volumes nearly at pre-COVID levels. The resilient DCF of HEP is a testament to the strength of its business model. As HEP currently has a distribution coverage ratio of 1.7, we consider the new distribution safe. HEP currently yields 8.3%. Swim With Magellan Midstream Partners Magellan Midstream Partners has the longest pipeline system of refined products, which is linked to nearly half of the total U.S. refining capacity. This segment generates 65% of its total operating income while the transportation and storage of crude oil generates 35% of its operating income. MMP has a fee-based model; only ~9% of its operating income depends on commodity prices. During the last decade, MMP has invested $6.1 billion in growth projects and acquisitions and has exhibited much better performance than the vast majority of MLPs. Most MLPs carry excessive amounts of debt, post poor free cash flows due to their capital expenses and dilute their unitholders to a great extent on a regular basis. On the contrary, MMP has posted positive free cash flows for more than 10 consecutive years and has a strong balance sheet. In addition, it does not dilute unitholders and maintains a healthy payout ratio. All these attributes confirm the discipline of its management, which invests only in high-return projects. In early May, MMP reported financial results for the first quarter of fiscal 2022 showing distributable cash flow fell 4% over the prior year's quarter, mostly due to losses from price hedges and some contract expirations in crude oil. Nevertheless, earnings-per-share of $1.10 exceeded analysts' consensus by $0.04. MMP has proved resilient to the pandemic and currently has a distribution coverage ratio of 1.24. Management expects total shipments of refined products to grow 4% this year and raised its guidance for annual distributable cash flow from $1.075 billion to $1.09 billion. MMP yields 8.4%. As oil skyrocketing oil prices boost the entire energy sector, Master Limited Partnerships such as these three provide particularly high yields to investors.

As Oil Pumps Higher, Check Out These 3 High-Yield MLPs

Here are three Master Limited Partnerships that have high yields above 5% and strong business models.

Columnist Conversation

Latest AAP Podcast With Portillo's CEO!

This Weekend on Real Money

Webinar Thursday After the Close: Option Spread Trading

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.