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How is it that some oil-based master limited partnerships have fallen more than the price of oil?
Oil and gas MLPs make their money by moving the commodities and are less impacted by the actual price of oil. Nonetheless, the market loves to overreact, putting a few MLPs on sale.
Now, a small selloff of MLPs is expected, given they operate the infrastructure of the energy sector. So any potential slowdown in oil demand is bad news for MLPs, but to fall more than commodity prices themselves is overdone.
The price of West Texas Intermediate crude oil has fallen 15.3% year-to-date. The Alerian MLP ETF (NYSEArca: AMLP) is down 16.3% over the same period. And the three high-yield MLPs listed below have all fallen more than WTI crude over the last month.
Looking at it another way, MLPs failed to rally as much as oil prices a few months ago, yet they’re now falling in line with oil. With all that in mind, here are three MLPs offering yields in excess of 7%, while just nine months ago, all three were offering yields below 5.5%.
Targa Resources Partners LP (NYSE: NGLS)
Targa Resources is down 16% over the last month and is now offering a hefty 10% distribution yield. It has been one of the worst-performing MLPs over the last year, with its units down close to 50% over the last 12 months.
It’s tough to find a yield as high as that of Targa Resources Partners. Its general partner is Targa Resources Corp. (NYSE: TRGP), which operates as a C corporation and can thus can attract steady institutional owners. However, the yield of Targa Resources Corp. is only 4.6%.
Targa Resources Partners is a key player in the midstream space, acting as a gatherer and processor of natural gas and natural gas liquids (NGLs). The big news for Targa Resources Partners has been the acquisition of the various Atlas companies, which will give it a larger presence in areas like the Permian Basin in the Southwest.
This relatively sizable acquisition has added some risk to the MLP and is likely keeping some investors away. However, for the long term, it’s a big positive, as Targa Resources Partners benefits from the rising demand of processing NGLs in the Gulf Coast area.
Enbridge Energy Partners LP (NYSE: EEP)
Enbridge Energy Partners has been another underperforming MLP of late. It’s down 15% over the last 30 days. It’s another high-yield MLP though, offering an 8% distribution yield. Part of the selling pressure on Enbridge comes from its exposure to the Canadian oil sands. However, this isn’t necessarily a negative.
It also has a strong presence in the Bakken shale, which means it benefits from transportation trends of light crude (Bakken) and heavy crude (Canada). Enbridge can also deliver oil to a variety of end markets, from eastern Canada and the Gulf Coast to the Northeast and the Midwest.
The action in Enbridge Energy Partners’ units might be overdone. Its stock is down 25% year-to-date, while WTI crude is down 15%. However, Enbridge generates over 80% of its operating income from fee-based sources (not tied to oil prices) and the rest is hedged, which means its cash flows are relatively steady.
Plains All American Pipeline LP (NYSE: PAA)
Plains All American is down 14% for the last month and offers a 7.6% distribution yield. It has exposure to crude oil, given that it’s a pipeline operator for both crude and NGLs. However, it is well positioned in the best basins in North America, with asset bases in the Eagle Ford and Bakken shales and the Permian Basin.
But more broadly, Plains All American is interesting because it has a more diversified revenue stream. Its transportation segment generates cash flow by moving oil and NGLs, with its storage assets benefiting from the stockpiling of cheap oil and gas. Then there’s its supply and logistics advantage. It actually benefits from oil volatility by making money on the spreads between commodity prices across the country.
Investing in high-yield securities can be scary, especially when they’re tied to an increasingly volatile market like commodities.. However, certain companies, including the three MLPs above, are sometimes afforded high yields because of market overreactions. The key is to focus on companies that have steady cash flow to cover distributions.
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