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The yields that MLPs offer have been attractive for several years now. And with the crash in oil prices, many of these yields have become too enticing to ignore.
The Alerian MLP ETF (NYSEArca: AMLP) offers a 6.7% yield — that’s more than triple the average S&P 500 dividend yield and the rate on the 10-year Treasury note. It’s also one of the highest distribution yields ever for the Alerian MLP ETF since it was created in late 2010.
Many oil-and-gas-related MLPs (master limited partnerships) have been sold off due to the crash in oil prices. But be aware: there’s a big difference between MLPs and oil and gas producers.
The oil and gas explorers and producers rely on the price of oil because they have to sell their products at those prices. Many pipeline MLPs are just concerned with volumes, not price.
One factor that’s positive for the pipeline operators is rising demand for gasoline —thanks to low gas prices, more people will be driving.
However, not all MLPs are created equal. Some MLPs have more exposure to oil and gas producers than others, and some are more focused on natural gas.
The key is to look for MLPs with longer-term contracts. Also look for names that have a high reliance on fee income, which means MLPs that collect their income based on the volume they move and not the price of the underlying commodity.
We’ve found three MLPs that generate a strong portion of their income from fee-based activities, which helps insulate the companies from oil price swings —so they should continue to do well even if oil and gas prices remain depressed for some time.
And even amidst the oil selloff, our three MLPs have been upping their distributions. Here are the top three MLPs to own following the oil crash:
Oil Selloff MLP No. 1: Enbridge Energy Partners LP (NYSE: EEP)
Enbridge Energy Partners offers the highest distribution yield of our MLP plays, coming in at 5.8%. And early next month, this MLP will be upping its quarterly distribution from $0.555 to $0.57 a share.
Enbridge Energy Partners has a fairly diversified portfolio of oil and gas systems in the U.S., with a strong presence in the Bakken shale and Canadian oil sands. Enbridge Energy Partners is responsible for transporting over 60% of the Canadian crude oil that’s currently coming into the U.S.
And even with its above-average distribution yield, it has a fairly low distribution ratio (think of this as a dividend payout ratio, but for MLPs). Enbridge Energy Partners’ distribution ratio (distribution divided by distributable cash flow) is under 80%.
Oil Selloff MLP No. 2: Western Gas Partners LP (NYSE: WES)
Western Gas Partners was formed in 2008 by Anadarko Petroleum (NYSE: APC). Many of this MLP’s gathering and processing assets are scattered across Texas, the Rocky Mountains and much of the Eastern part of the country. It not only can grow with asset drop-downs from Anadarko, but it has its own organic projects in the works.
Anadarko Petroleum is a $40 billion oil and gas producer that has been hit hard along with the tanking of oil prices. Yet it’s still a large and diversified player, with a healthy balance sheet.
Western Gas Partners offers a 4% distribution yield. During the fourth quarter of 2014 it upped its quarterly distribution to $0.675 a share —marking its 21st consecutive quarter of quarterly distribution increases.
Despite its position as the smallest MLP on our list, with an $8 billion market cap, there’s still a lot to like here. Trading at a price-to-earnings ratio of 23, it’s one of the cheapest MLPs around. It also has one of the more solid balance sheets among pipeline MLPs —it carries just $2 billion in debt.
Oil Selloff MLP No. 3: Enterprise Products Partners LP (NYSE: EPD)
With a $66 billion market cap, Enterprise Products Partners is one of the largest oil and gas pipeline operators around. It provides midstream services (including gathering, transportation and storage) to oil and gas producers, with over 50,000 miles of pipelines.
The MLP offers a 4.3% dividend yield and next week it’s upping its quarterly distribution from $0.365 to $0.37 a share. Shares of this MLP are down 12% over the last six months.
But it’s worth noting that Enterprise Products Partners is a key player in the natural gas liquids (NGL) market. It has an end-to-end system for connecting producers with end-users in the NGL market, which allows Enterprise Products Partners to capitalize on increased NGL production.
In the end, investors looking for a simpler option when investing in oil and gas pipeline MLPs can choose to own the Alerian MLP ETF (NYSEArca: AMLP). It yields 6.7% and its top three holdings are Enterprise Products Partners, Plains All American Pipeline (NYSE: PAA) and Energy Transfer Partners (NYSE: ETP).
But it is worth noting that the three MLPs in this list have all outperformed the Alerian MLP ETF handily over the last one-year and three-year periods.
Sure there are a number of pipeline MLPs providing high-yield opportunities, but not all are created equal. When buying an MLP, know its business and exactly what you are exposed to in the investment. It’s a smart way investors can find value in this oil crash, which has led to a selloff of everything oil-related, justified or not.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom.