The Mark of a Superior MLP


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Petroleum transportation MLPs should meet these three criteria before you buy in.

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The Mark of a Superior MLP

  1. 1. The Mark of a Superior MLP
  2. 2. Energy master limited partnerships come in all shapes and sizes, across all stages of the value chain.
  3. 3. Once you feel comfortable with the MLP structure, the real decisions must be made. “Which MLP should I buy?”
  4. 4. It is important to evaluate prospective MLP investments based on their specific business model. Exploration & Production Natural gas transportation Marine transportation Petroleum transportation Refining
  5. 5. Petroleum Transportation Let’s look at Petroleum Transportation MLPs. MLPs in this sub-sector transport and/or store oil and refined products.
  6. 6. Petroleum Transportation Petroleum transportation MLPs make up 35.2% of the Alerian Index, which is outperforming the S&P 500 year-to-date.
  7. 7. Petroleum transportation
  8. 8. Oil, Oil, Everywhere Business is booming as oil producers drive U.S. oil production to levels not seen since the 1980s
  9. 9. Petroleum Transportation 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
  10. 10. Credit Rating 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)
  11. 11. Credit Rating Duds Genesis Energy (NYSE: GEL) S&P Rating: BB- Oiltanking Partners (NYSE: OILT) S&P Rating: Not Rated (These things take time)
  12. 12. Credit Rating Studs Magellan Midstream Partners (NYSE: MMP) S&P Rating: BBB+ (Highest possible rating for an MLP) Plains All American Pipeline (NYSE: PAA) S&P Rating: BBB
  13. 13. Distribution Coverage 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 reason why.
  14. 14. Distribution Duds Enbridge Energy Partners (NYSE: EEP) TTM Coverage Ratio: 0.73x Buckeye Partners (NYSE: BPL) TTM Coverage Ratio: 0.97x
  15. 15. Distribution Studs Oiltanking Partners (NYSE: OILT) TTM Coverage Ratio: 1.86x Sunoco Logistics Partners (NYSE: SXL) TTM Coverage Ratio: 1.74x
  16. 16. 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.
  17. 17. Debt Dud Enbridge Energy Partners (NYSE: EEP) ~4.3x Debt to EBITDA Trying, but not there yet. Credit: EEP investor presentation
  18. 18. Debt Stud Magellan Midstream Partners (NYSE: MMP) Debt-to-Adjusted EBITDA Ratio: ~2.5x Credit: MMP investor relations
  19. 19. Key takeaways Many investors will get drawn in by an MLP’s yield, but remember, only the best of the best will have: • Solid credit rating • Distribution coverage • Sound debt levels
  20. 20. Top Dividends for the Next Decade