3 Master Limited Partnerships to Buy With High Yields
Master limited partnerships, otherwise known as MLPs, are appealing for income investors. MLPs widely offer high distribution yields above 5%. A select few MLPs even have yields above 10%.
Of course, investors should always do their due diligence to make sure the underlying distribution is secure. Many high yield stocks have a tendency to cut or suspend their payouts, particularly during recessions.
As a result, investors should seek a balance between yield and safety when it comes to dividend investments. The following three master limited partnerships have high yields above 5%, but also should be able to maintain their distributions if a recession occurs.
|HEP||Holly Energy Partners||$17.24|
|PAA||Plains All American Partners||$11.04|
MLPs: Holly Energy Partners (HEP)
Holly Energy Partners (NYSE:HEP) is a midstream MLP, meaning it operates transportation and storage facilities for crude oil and petroleum. It operates in 10 states, including Texas, Nevada and Washington. HEP also has refinery facilities in Utah and Kansas.
HEP was founded in 2004 by HF Sinclair (NYSE:DINO) and generates revenue by charging customers a fee for transporting and storing petroleum products.
One advantage of this business model is that nearly all the revenues of HEP are fee-based. As a result, these revenues are hardly affected by prevailing commodity prices. Instead, they are proportional to the volumes transported and stored by the MLP. These volumes are reliable because they are determined by long-term contracts, which pose strict minimums to the customers of the MLP.
In addition to organic volume growth, acquisitions are a future growth catalyst for Holly Energy. On March 14, 2022, HEP completed the acquisition of the pipelines and terminal assets of Sinclair Transportation. The deal includes 1,200 miles of pipelines of crude oil and products, eight product terminals and two crude terminals. HEP paid $325 million and issued 21 million of common units to pay for the deal, which is valued at $758 million.
HEP achieves growth thanks to contractual tariff escalators, which raise the fees it charges to its customers over time, and the addition of new pipelines. HEP has more than 800 miles of crude oil gathering facilities in the Permian Basin and can continue leveraging its footprint in this area for years.
As HEP currently has a distribution coverage ratio of 1.7, we consider the new distribution as safe. Units currently have a distribution yield of 8%.
Next on our list of MLPs is MPLX (NYSE:MPLX) is another midstream MLP that operates in two segments. Its first segment is logistics and storage, which relates to crude oil and refined petroleum products. The second segment is gathering and processing, which stores and transports natural gas and natural gas liquids.
MPLX has generated steady financial results in 2022. In the first quarter, net income and distributable cash flow per share grew 12% and 8%, respectively, over the prior year’s quarter. The strong performance resulted from 4% volume growth in logistics and storage, higher prices and higher volumes in gathering and processing.
Pipelines tend to have a stronghold in terms of extracting economic rents. Building pipelines requires years of approvals and ongoing regulation. As such, the incumbent positions enjoy toll booth-type business models, with a good portion of their revenue fixed via fee-based and take-or pay-agreements. MPLX in particular has a strong position in the Marcellus-Utica region, with long-term contracts from Marathon.
MPLX maintained a healthy consolidated debt to adjusted EBITDA ratio of 3.7x and a solid distribution coverage ratio of 1.65. These metrics represent healthy levels of debt on the balance sheet and a sustainable distribution payout. MPLX currently yields 8.7%.
MLPs: Plains All American (PAA)
Plains All American Pipeline (NASDAQ:PAA) is a midstream energy infrastructure provider. The company owns an extensive network of pipeline transportation, terminals, storage and gathering assets in key crude oil and natural gas liquids-producing basins at major market hubs in the United States and Canada.
On average, the company handles more than 7 million barrels per day of crude oil and NGL through 18,370 miles of active pipelines and gathering systems. Plains All American generates around $40 billion in annual revenues.
The company rebounded from the coronavirus pandemic very well. In April, Plains All American hiked its distribution by 21% to a little more than 21 cents.
In the 2022 first quarter, revenue of $13.7 billion rose 63% year-over-year. Growth was driven by rising demand, as global oil and gas demand is finally back to pre-Covid levels. Higher global oil prices were also a positive contributor, as they nearly doubled year-over-year, with WTI and Brent trading over $100 a barrel.
Finally, increased production in the Permian Basin significantly boosted results, ending the quarter at roughly 5.2 million barrels a day, compared to 3.7 million barrels in the prior-year period.
Distributable cash flows grew 11.7% to 56 cents on a per-unit basis. During the quarter, the company repaid $750 million of senior notes and repurchased 2.4 million common units for $25 million, leaving up to $75 million available for potential discretionary repurchases over the balance of the year. This brought its cumulative repurchases to around $250 million since November 2020.
Following better than expected results, management increased its full-year 2022 adjusted EBITDA guidance by $75 million to plus or minus $2.275 billion. PAA’s payout ratio is currently sitting at relatively comfortable levels, expected at ~40% for 2022.
The company enjoys some competitive strengths, including a geographically diverse and interconnected asset base that provides operational flexibility, a high-quality customer base that supports sustainable fee-based cash flow generation (Marathon Petroleum, Phillips 66, etc.), and a highly experienced management team.
The recovery of the energy sector from the coronavirus pandemic of the past two years is clear. Oil and gas prices have spiked, while demand is back to pre-pandemic territory. This has led to a meaningful improvement for the midstream MLPs.
These three midstream giants have strong business models, quality assets and high distribution yields above 5%. In addition, their distributions should be sufficiently covered by distributable cash flow. This makes these MLPs attractive options for income investors.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.