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4 MLPs to Cash in on Trump's Pipeline Push

Nilanjan Choudhury

Units of energy infrastructure master limited partnerships (or MLPs) have seen renewed interest from investors after President Trump took steps to fast-track two controversial oil pipeline projects.

In his short time as President, Donald Trump is being credited with the revival of the U.S. MLP sector that was reeling under the twin forces of a prolonged oil price slump and bitter opposition from environmental activists.

The Business of MLPs

MLPs differ from regular stocks in that interests in them are referred to as units and the unitholders (not shareholders) are partners in the business. Importantly, these hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Finally, the assets that these partnerships own – oil and natural gas pipelines and storage facilities – typically bring in stable fee-based revenues and have limited, if any, direct commodity-price exposure. This enables these MLPs to pay out fairly growing distributions.

Advantages of the MLP Structure

Higher Returns: MLPs represent an attractive investment option for income-focused investors in the current environment. In addition to high yields, MLPs are structured as pass-through entities.

This means that they typically distribute nearly all of their cash flows back to unitholders. The MLPs are not required to pay a corporate income tax as the tax liability of the entity is passed on to its owners (or unitholders) in the form of a cash dividend (distribution). This allows the MLPs to offer very attractive yields to the investors.

Low Risk: Most MLPs are involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products, under long-term contracts. As such they have relatively consistent and predictable cash flows, unlike exploration and production (E&P) companies, whose profits are highly correlated with commodity prices.

Like all high-income products, MLPs also tend to react negatively to rise in interest rates initially. But research shows there is no material correlation between 10-year treasury rates and Alerian MLP index performance in the longer-term.

One of the reasons is that many MLPs use fixed rate debt for majority of their borrowings. Another reason could be that investors hold MLPs for a long time due to tax consequences and thus they do not have a significant adverse reaction to rising interest rates unlike other rate sensitive assets like utilities and REITs.

Further, MLPs have low correlations with many other asset classes including equities and commodities and thus add diversification benefits to the portfolios.

Trump’s Pipeline Push

Making good on his campaign promises to rev up infrastructure spending, President Trump signed executive orders to smooth the way for TransCanada Corp.’s TRP Keystone XL Pipeline and Energy Transfer Partners L.P.’s ETP Dakota Access Pipeline just a few days into his new Administration.

With the U.S. government indicating that it will expedite approvals of future developments as part of new energy infrastructure projects, the benchmark Alerian MLP Index AMLP is currently up approximately 65% from its Feb 2016 lows.

How to Identify the Outperformers?

With a wide range of energy partnerships thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver attractive returns. Moreover, despite Trump’s ‘America-first energy’ plan and his efforts to remove environmental blocks to pipeline projects, all pipeline stocks have not rallied.

While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy. We highlight the following stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment in the prevailing operating background. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

4 Stocks to Invest In

PBF Logistics L.P. PBFX: Parsippany, NJ-based PBF Logistics operates refined petroleum products storage and transporting facilities. The partnership carries a Zacks Rank #1.

Global Partners L.P. GLP: Headquartered in Waltham, MA, Global Partners – a Zacks Rank #2 stock – owns, controls or has access to one of the largest terminal networks of refined petroleum products in New England.  

Sprague Resources L.P. SRLP: Portsmouth, NH-based Sprague Resources, a Zacks Rank #2 master limited partnership, purchases, stores, distributes and sells petroleum products and natural gas in the U.S.

Cheniere Energy Partners L.P. CQP: With its headquartered in Dallas, TX, Cheniere Energy Partners owns and operates the Sabine Pass liquefied natural gas terminal in Louisiana. The firm holds a Zacks Rank #2.

Bottom Line

The fact that MLPs often offer a higher yield than other stocks makes them more attractive as investment opportunities. They also offer liquidity and tax benefits which add to their appeal. Importantly, with President Donald Trump President prioritizing energy development, these MLPs are set to experience handsome unit price appreciation.

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PBF Logistics LP (PBFX): Free Stock Analysis Report
ENERGY TRANSFER PARTNERS (ETP): Free Stock Analysis Report
Global Partners LP (GLP): Free Stock Analysis Report
Cheniere Energy Partners, LP (CQP): Free Stock Analysis Report
TransCanada Corporation (TRP): Free Stock Analysis Report
Sprague Resources LP (SRLP): Free Stock Analysis Report
ALERIAN-MLP (AMLP): ETF Research Reports
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