Published Mon, 11 Mar 2013 08:00 CET by DividendYields.orgMaster Limited Partnerships (MLPs) in the energy sector provide the highest average yield among the income-oriented securities (see chart below). Their favorable tax structure, whereby MLPs avoid double taxation by passing almost all partnership income to investors and whose distributions are about 80% tax-deferred, makes these investment instruments popular with income seekers. Wells Fargo Securities projects that these instruments, which, on a median basis, yield 7.5%, will see total returns of about 20% this year. Positive catalysts for appreciation will be the prevailing low interest rate environment and the appeal of MLP yields in the yield-starved and economically fragile backdrop. Robust infrastructural capacity expansions that are fueling output growth are also positive factors for continued growth in cash flow and distributions. While there are many MLPs offering high yields, some are better positioned for robust growth than others. Focusing on growth-oriented MLPs (and a corporation whose dividends depend on an MLP’s distributions), here is a closer look at five high-yield, high-growth energy income plays that are well positioned to produce market-beating total returns.
LinnCo (LNCO) is a holding company for the shares of the MLP Linn Energy (Nasdaq: LINE). The company pays a similar dividend yield as LINE – currently equal to 7.1% – but its yield is somewhat lower than LINE’s due to the impact of corporate taxation on LNCO. The model removes the complexities of the MLP taxation and tax reporting, which makes LNCO a good retirement income stock. As LNCO derives its dividend income from LINE distributions, LNCO’s dividend depends on the stability of LINE operations. LINE is the 7th largest MLP. It operates with an objective to “acquire, develop, and maximize cash flow from a growing portfolio of long-life oil and natural gas assets”. The partnership has been growing through accretive acquisitions – investing some $14 billion in acquisitions over the past decade. It recently acquired Berry Petroleum (NYSE: BRY) for $4.3 billion, which will be immediately accretive to LINE’s bottom line and will result in an 8.5% increase in LNCO’s dividend for the third quarter of 2013, including the 2% increase in the first quarter of this year. LINE’s adjusted EBITDA increased 40.6% in 2012 from the year earlier, and is projected to increase another 15.5% this year, excluding the positive effect from the latest acquisition. In 2013, LINE’s distribution coverage is expected to average 1.11x. LNCO is trading at 16.2x forward earnings, while LINE is trading at an EV/adjusted EBITDA of 10.8 and a price-to-distributable cash flow of 11.7x.
Access Midstream Partners LP (ACMP) is a growth-oriented MLP that operates an extensive natural gas pipeline network and serves as the largest natural gas gathering and processing MLP in North America, as measured by volume and invested capital. It operates a low-risk business model, earning fixed fee revenues from long-term contracts without any direct commodity price exposure. This model creates cash flow stability and visibility, providing security for ACMP’s cash distributions. As an illustration of its fast growth, ACMP’s adjusted EBITDA increased 37% in 2012, and is forecasted to grow between 67% and 78% in 2013 and between 29% and 38% in 2014. For income investors, this high growth MLP provides a desired combination of high distribution yield and distribution growth, which, based on historical data, has proven to be a winning combination for achieving market-beating total returns. ACMP’s distributions yield 4.6%. Its distribution growth over the past year was high at 15.4%. Analysts expect ACMP to continue raising distributions at a 15% annual rate for the next two years. The MLP has flexible distribution coverage of 1.23x distributable cash flow in 2012. Up nearly 33% over the past year, ACMP is trading at an EV/adjusted EBITDA of 18.8x and a price-to-distributable cash flow of 19.3x.
Update 2 February 2015: Williams Partners L.P. and Access Midstream Partners L.P. today announced the closing of the merger between Williams Partners and Access Midstream Partners. As part of the completion of the merger, Access Midstream Partners changed its name to Williams Partners L.P. and its units will trade under the symbol WPZ beginning on Feb. 3.
Mid-Con Energy Partners LP (Nasdaq: MCEP) is a another growth-oriented MLP that owns, operates, acquires, exploits and develops producing oil and natural gas properties in North America, with a focus on the Mid-Continent region. The company increased its production by some 60% to 1,907 barrels of oil equivalent (Boe) per day on average in 2012 from 1,191 Boe per day on average in 2011. Its total production is projected to rise to a range of 2,525-2,675 Boe per day on average in 2013, implying an increase of up to 40% for the year. MCEP’s adjusted EBITDA nearly doubled last year, and is projected to increase 28% this year. Distributable cash flow will also increase by about 21% in 2013. All this bodes well for continued distribution growth, which the MLP is targeting at between 6% and 8% in fiscal year 2013. The partnership’s distribution coverage for 2013 is very flexible at 1.3x distributable cash flow. MCEP is trading at an EV/adjusted EBITDA of 11.1x and a price-to-distributable cash flow of 10.8x. This MLP is paying a high yield of 8.3%.
Targa Resources Partners LP (NYSE: NGLS) is a “growth-oriented provider of midstream natural gas, NGL, terminaling and crude oil gathering services, and is one of the largest independent midstream energy companies in the United States”, according to the partnership. Its leadership positions in the Permian Basin and Barnett Shale, along with its entry into the Bakken Shale, promise strong output and cash flow growth in the future. The MLP recently reported that its 2012 adjusted EBITDA grew by 4.9% and distributable cash flow increased some 5.1% from the year earlier. The partnership recently raised its adjusted EBITDA guidance for 2013 by 10%-to-15%, implying adjusted EBITDA growth of up to 26% this year. NGLS also continues to expect 2014 EBITDA growth in excess of 25%. This MLP is paying a high yield of 6.2%, and is planning to hike its cash distributions by 10%-to-12% this year. NGLS has distribution coverage of 1.1x, as its stable cash flows from high-quality assets provide security for cash distributions. NGLS is trading at an EV/adjusted EBITDA of 13.2x and a price-to-distributable cash flow of 12.6x.
Genesis Energy LP (NYSE: GEL) is a midstream energy infrastructure MLP that operates pipelines, crude oil logistics, and refinery-related plants. The MLP has seen robust growth over the past several years and is attractive as it operates fixed-margin businesses, with limited commodity price exposure. Its 2012 adjusted EBITDA and distributable cash flow each grew 30% over the year before, with distributable cash flow reaching a new record. This MLP, which is yielding 4.1%, has had 30 consecutive quarterly dividend increased, 25 of which were 10% or higher over the prior-year quarter. With the MLP’s targeting low double-digit growth in distributions, analysts estimate that the long distribution growth streak will continue at a 10% clip for at least the next three years. GEL has distribution coverage of 1.2x. It is trading at an EV/adjusted EBITDA of 21.0x and a price-to-distributable cash flow of 21.6x.