Growth and income. What more could you want in an investment?
Seem impossible? It is, in fact, within your reach.
With the United States is poised to become the world's leading oil producer by 2017 and a net oil exporter by 2030, opportunities abound to boost profits for U.S. oil pipelines and terminals.
So how does this figure into the growth/income balance? It's all bundled in one acronym: MLPs, or master limited partnerships.
These companies own the pipelines, storage facilities and terminals that move oil from the wellhead to the refinery and from refineries to rail and shipyards. Pipeline MLPs have stable business models that generate strong income; they depend more on the volume of product transported than on energy prices.
In addition, competitive pricing pressures are mostly absent because pipelines serve different geographic areas. As a result, pipeline MLPs typically pay generous distributions and yields as high as 5% to 6%.
One of my favorite pipeline MLPs is forecast to grow income by 37% next year. This MLP looks undervalued at a forward price-to-earnings (P/E) ratio of 16, despite share price gains of more than 40% in the past 12 months. And this MLP yields 5% and has raised payout 50% in the past seven years.
So what is my favorite pipeline MLP? TransMontaigne Partners (TLP). It owns terminals, storage facilities and related assets along the Gulf Coast, in the Midwest and Southeast, and along the Mississippi and Ohio Rivers.
TransMontaigne provides services under long-term (and mostly fixed-rate) contracts to marketers of crude oil, petroleum, chemicals, fertilizers and other liquid products. It operates 49 terminals that represent 23.4 million barrels of storage capacity. The MLP has a leading presence in five major oil and gas markets.
The company's Gulf Coast terminals have 6.9 million barrels of storage capacity and handle product from the Caribbean and Latin America. TransMontaigne's Southeast terminals are located along various points of the Plantation and Colonial pipelines and have storage capacity of approximately 10 million barrels.
TransMontaigne's Brownville, Texas, terminals handle shipments between the Gulf of Mexico, northern Mexico and the United States, and have Mexican energy giant PEMEX as a major customer. Facilities in Oklahoma, Missouri and Arkansas provide transport and terminal services to Shell Oil-U.S. -- a division of Royal Dutch Shell (RDS-A).
Roughly two-thirds of this MLP's income is generated by fee-based, long-term contracts. These contracts ensure a predictable income stream to cover future distributions.
TransMontaigne will experience robust growth next year due to its 42.5% ownership stake in an oil terminal under construction on the Houston ship channel. In December 2012, the MLP paid $79 million to Kinder Morgan (KMI) for a stake in Battleground Oil Specialty Company (BOSTCO).
The BOSTCO terminal is ideally positioned to benefit from rising U.S. energy exports.
Initially, 50 tanks with 6.1 million barrels of storage capacity will be built. The project will cost about $425 million. Operations will begin in late 2013; the full 6.1 million barrels of storage capacity and related infrastructure are due to come on line in early 2014. In addition, TransMontaigne plans to build a bolt-on expansion project that will add another 900,000 barrels of vapor-to-liquid storage to BOSTCO later this year.
BOSTCO will have a powerful effect on TLP.
Analysts forecast 37% income growth next year when the BOSTCO terminal is fully operational, and TransMontaigne's CEO expects the new terminal to put the company on a growth trajectory for the next several years.
The BOSTCO acquisition was the main reason that Stifel Nicolaus recently upgraded TLP's rating to "buy" from "hold." The boost in income from the new terminal should support rising payouts to TransMontaigne investors in the years ahead, something they have long enjoyed.
Since 2009, TransMontaigne's income has grown 25% to $42.1 million; distributable cash flow has increased 32% to $58.1 million; and distributions to investors have improved 31% to $41.8 million.
TransMontaigne's financial ratios also stack up well against industry peers. In the past 12 months, the MLP has posted a net margin of 25% and a return on equity (ROE) of 10%. This compares favorably to peers' net margins averaging 9% and ROE averaging 8%.
At a stock market value of $734 million, TransMontaigne is smaller than industry peers Holly Energy Partners (HEP) and DCP Midstream Partners (DPM), which are valued at more than $2 billion each. However, its smaller size has benefits -- TransMontaigne experiences better gradual growth potential from small acquisitions and expansion projects.
Risks to consider: The MLP is controlled by affiliates of TransMontaigne Inc. and Morgan Stanley, which gives Morgan Stanley the power to veto significant acquisition or investment decisions. In addition, TransMontaigne may take on debt to fund its portion of BOSTCO construction costs. The MLP recently filed a $1 billion shelf for a mixed debt and/or equity offering.
Action to Take --> TransMontaigne has provided 66% gains and an 8% average yield to investors in the past five years. In addition, the MLP's recent acquisition of a stake in the BOSTCO deep water terminal is a major catalyst for future income and distribution growth.
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