Energy master limited partnerships come in all shapes
and sizes, across all stages of the value chain.
Once you feel comfortable with the MLP structure,
the real decisions must be made.
“Which MLP should I buy?”
It is important to evaluate prospective MLP
investments based on their specific business model.
Exploration & Production
Natural gas transportation
Let’s look at Petroleum Transportation MLPs.
MLPs in this sub-sector transport and/or store
oil and refined products.
Petroleum transportation MLPs make up
35.2% of the Alerian Index,
which is outperforming the S&P 500 year-to-date.
Oil, Oil, Everywhere
booming as oil
drive U.S. oil
seen since the
There are 22 petroleum MLPs to choose from right now.
Like any investment category, there are studs and duds.
A fiscally fit petroleum MLP will have three things:
Photo credit: Michael Parry
1. Investment grade credit rating
Love ‘em or hate ‘em, a blessing from the credit
rating agencies will lower your MLPs cost of capital,
giving it an advantage over its peers.
Investment grade credit rating =
BBB- or higher (Standard & Poor’s)
Baa3 or higher (Moody’s)
Credit Rating Duds
S&P Rating: BB-
S&P Rating: Not Rated
(These things take time)
Credit Rating Studs
Partners (NYSE: MMP)
S&P Rating: BBB+
(Highest possible rating
for an MLP)
Plains All American
Pipeline (NYSE: PAA)
S&P Rating: BBB
2. Distribution coverage ratio > 1.0 times
You could be in for a rude awakening if your
petroleum MLP can’t cover its distribution. Most of
these businesses generate revenue from fee-based
contracts, so if management can’t make things work
with that reliable income, they better have a good
Partners (NYSE: EEP)
TTM Coverage Ratio: 0.73x
TTM Coverage Ratio: 0.97x
Safe Debt Levels
3. Debt-to-Adjusted EBITDA < 4.0 times
MLPs will have higher debt levels than regular C-
corporations, but they still need to be reasonable.
The credit ratings agencies like to see debt levels
around 4.0 times EBITDA, and absolutely no higher
than 4.5 times EBITDA. Any higher, and it will affect
your credit rating.
Partners (NYSE: EEP)
~4.3x Debt to EBITDA
Trying, but not there
Credit: EEP investor presentation