Tags: master limited partnerships | oil and gas industry | energy

Bob Ciura: 3 Master Limited Partnerships With 5%+ Yields & Safe Payouts

Bob Ciura: 3 Master Limited Partnerships With 5%  Yields & Safe Payouts

Bob Ciura By Monday, 03 October 2022 11:10 AM EDT Current | Bio | Archive

The S&P 500 Index is currently down 25% year-to-date. When stock prices decline, dividend yields rise. But extremely high dividend yields can be a precursor to a dividend cut, if the company’s fundamentals are deteriorating.

Therefore, investors should exercise some caution when viewing stocks with abnormally high yields. This is particularly true in the MLP space.

Fortunately, there are a select few Master Limited Partnerships that have strong business models, with strong cash flow that sufficiently covers their generous distributions even during recessions. These 3 MLPs have attractive yields above 5%—and just as importantly, have secure payouts.

Enterprise Products Partners LP (EPD)

Enterprise Products Partners is structured as an 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 2022 second quarter, EPD’s revenue increased 69.95% to $16.1 billion year-over-year. Distributable cash flow stood at $2.0 billion, up by 30% from $1.6 billion in the year-ago period and provided 1.9 times coverage of the distribution declared. Adjusted cash flow provided by operating activities stood at $2.1 billion, up from $1.7 billion year-over-year.

Crude oil pipelines & services segment decreased to $407 million from $419 million in Q2 2021. Furthermore, crude oil pipeline transportation volume stood at 2.2 million barrels (bbl) per day, up from 2.0 million bbl per day in the yar-ago period.

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 over 1.6x, 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 24 years in a row. Enterprise Products has tremendous competitive advantages, primarily its vast network of assets. Units currently yield 8.0%.


MPLX LP is another midstream MLP. Like Enterprise Products, MPLX has a large network of midstream infrastructure assets. operates in two segments: Logistics and Storage – which relates to crude oil and refined petroleum products – and Gathering and Processing – which relates to natural gas and natural gas liquids (NGLs).

In early August, MPLX reported (8/2/22) financial results for the second quarter of fiscal 2022. Adjusted EBITDA grew 6% but distributable cash flow (DCF) per share remained flat vs. the prior year’s quarter. Total pipeline volumes grew 6% but the average tariff rate dipped -7%. MPLX maintained a healthy consolidated debt to adjusted EBITDA ratio of 3.5x and a solid distribution coverage ratio of 1.7.

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. In addition, the revenues of MPLX are reliable thanks to the long-term contracts with parent company Marathon. Overall, the 9.5% distribution yield of MPLX is safe for the foreseeable future.

Magellan Midstream Partners LP (MMP)

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 about $6 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. They also tend to have payout ratios near or above 100%. On the contrary, MMP has posted positive free cash flows for more than 10 consecutive years and has a strong balance sheet.

In the 2022 second quarter, distributable cash flow declined by 15% over the prior year’s quarter, mostly due to some contract expirations in crude oil and higher interest expense. Adjusted earnings-per-share of $0.90 exceeded analysts’ consensus by $0.01. MMP has proved resilient to the pandemic and currently has a distribution coverage ratio of 1.25.

Management expects total shipments of refined products to grow 4% this year and reaffirmed its guidance for annual distributable cash flow of $1.09 billion.

The competitive advantage of MMP comes from its fee-based model, its great scale and its discipline to invest only in high-return projects. Moreover, instead of issuing new units to fund growth projects, like many weaker MLPs, MMP is now repurchasing its own units to enhance unitholder value. Units currently yield 8.7%.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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The S&P 500 Index is currently down 25% year-to-date. When stock prices decline, dividend yields rise. But extremely high dividend yields can be a precursor to a dividend cut, if the company's fundamentals are deteriorating.
master limited partnerships, oil and gas industry, energy
Monday, 03 October 2022 11:10 AM
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