Last year was one for the record books when it comes to master limited partnerships (MLPs). But not necessarily in a good way. The tax structure was long favored by investors seeking high dividends in our world of low interest rates. However, thanks to changes to the tax code and the Fed’s path to normalcy, MLPs have been falling by the wayside. Both in share price from rising rates and in actual existence.
Thanks to the Republican tax plan, MLPs do not necessarily make much sense anymore and many parent/GPs have been swallowing their MLP subsidiaries. For income seekers, this removes many potential opportunities to score an extra high-yield.
But investors shouldn’t fret too much.
There are still a few MLPs sticking around and more importantly, those that are, happen to be some of the best and strongest partnerships around. And with the supply of MLPs dwindling, analysts expect a good year ahead for the remaining firms.
With that in mind, here are three MLPs to buy for the new year.
Source: Riccardo Annandale Via Unsplash
Distribution Yield: 8.27%
It’s not often you can find real growth potential and strong cash flows/distribution increases. Often, it’s one or the other when it comes to MLPs. But MPLX (NYSE:MPLX) has both in spades.
Originally, MPLX was set-up by refining giant Marathon Petroleum Corp (NYSE:MPC) to own the various pipelines that feed its facilities. However, in the years since launching, the MLP has become a giant in its own right — controlling thousands of miles worth of pipelines, processing assets and storage terminals. A huge part of that is focused on natural gas after its game-changing acquisition of MarkWest. This brought in plenty of natural gas gathering, transportation and fractionators under its umbrella.
This provided MPLX with a steady base with the refining assets as well as high growth operations from the natural gas portion. What it has really done is make MPLX a cash flow and distribution machine since its IPO. Since 2016 alone, MPLX has managed to see its distributable cash flows jump a whopping 224%! Distributions have increased by 125% since its IPO in 2012 and the MLPX currently yields a big 8.27%.
With new growth opportunities in the Permian and other points in Texas, MPLX shouldn’t be able to keep the growth going in the new year. And with MPC’s management already signaling that the MLP structure works for them, investors know this is one firm that will last for a while.
All in all, MPLX represents one of the best MLPs to bet on for 2019 and into the future.
Magellan Midstream Partners, L.P. (MMP)
Source: Tony Webster via Flickr
Distribution Yield: 6.91%
Magellan Midstream Partners, L.P. (NYSE:MMP) proves that boring is beautiful when it comes to MLPs. MMP has long been a port in the storm and it has continued to reward shareholders throughout its history. The key is its focus on crude oil.
Magellan’s 11,000+ miles worth of pipelines and storage facilitates makes up the largest refined petroleum products pipeline system in the country. Roughly half of the nation’s total refining capacity, either going into refineries or coming out to end-users, can tap into one of MMP’s system of pipelines, terminals or storage farms.
This huge system provides Magellan with plenty of cash flow generation, that in turn trickles down to investors. Over the last 18 years, MMP has managed to increase its distribution every year and it has done so at an annual rate of around 10% per year.
Perhaps the best part of MMP is that it has some of the most conservative management in the entire MLP sector. They only invest in quality projects and don’t chase returns. They also try and keep coverage ratios at great levels. With that, MMP’s management is pulling back slightly on its distribution growth — targeting 8% — and investing $2.5 billion in some new pipelines for additional growth. All of which should keep its coverage ratio at around 1.2x. That’s just perfect for MLPs.
And perfection is what you get with MMP. For investors still looking for MLPs, Magellan deserves a place in your portfolio.
Hess Midstream Partners LP (HESM)
Source: Mike Mozart via Flickr
Distribution Yield: 7.81%
MLPs succeed based on the strength of their partners. Drop-downs can be an integral part of how an MLP grows. So, naturally, if the firm’s partner is big and growing, then the MLP will be as well. A good example of this could be Hess Midstream Partners LP. (NYSE:HESM).
A couple of years ago, energy stock Hess (NYSE:HES) was the target of activist investors. That shook up shares, resulted in asset sales and the MLP launch of HESM. The IPO of its pipeline assets turned out to be a great decision for HES and its investors.
HESM focus is on the prolific Bakken shale, where Hess owns more than 550,000 acres of land. The Bakken continues to be one of the hotbeds of drilling activity in the U.S. Despite that, infrastructure to get that crude oil out of the ground and to market remains poor. Because of this, HESM has a major foothold in the region and can charge some pretty hefty rates for other drillers to use its system. Meanwhile, HES provides plenty of stable volumes/cash from its drilling activity.
The continued growth in drilling and throughput in its system has allowed HESM to see an amazing 19% compound annual growth rate (CAGR) for earnings and a 15% CAGR for its distributable cash flows. The best part is, there’s still dropdown potential from its parent and increased demand from other shippers.
With 100% of its revenues coming from fees rather than the price of oil and contracts averaging 10 years, HESM still has plenty of growth left in the tank. It may be new, but Hess Midstream is already becoming one of the best MLPs to buy.
At the time of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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