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Oil prices continue to hover around $50 a barrel, suggesting low oil is here to stay. Here are three MLPs that will profit regardless, while also offering investors income.
When it comes to the selloff of everything oil-related over the last seven or so months, MLPs (master limited partnerships) too have been guilty by association.
But certain MLPs will continue to perform well even if oil prices remain depressed for the longer term.
Consider the fact that the Alerian MLP ETF (NYSEArca: AMLP) is down just 10% since July, while the U.S. Oil Fund ETF (NYSEArca: USO) is down 50%.
For those of you that don’t know, MLPs are a bit of a different vehicle; specifically, midstream MLPs. These are the companies that transport oil and gas across the country via pipelines.
MLPs simply collect a fee for the oil they transport, rather than having to worry about buying or selling oil at certain prices.
Now, granted, pipelines do compete with the railroads when it comes to moving oil.
But there were two crude-oil-carrying train derailments last week. One was a CSX (NYSE: CSX) train in West Virginia that sent several railcars up in flames. The other was a Canadian National Railway (NYSE: CNI) train in Canada.
These recent incidents should further put pipelines into the spotlight as a safer alternative, when compared to railroads.
The other key for MLPs is that they are great ways to collect income. So, you have income and a way to insulate yourself from the volatility in oil prices.
All around, MLPs are one of the best ways for investors to keep exposure to the energy sector, which after all, is still a huge part of the strengthening economy.
Here are three MLPs that look enticing regardless of the price of oil:
No. 1 MLP Play for Low Oil: Energy Transfer Partners LP (NYSE: ETP)
With a market cap of $20 billion, Energy Transfer Partners offers one of the highest distribution yields of the major MLPs, coming in at 6.7%. It has historically had a focus on transporting natural gas and natural gas liquids, but it’s been diversifying its business model.
It bought up its affiliate Regency Energy Partners for $11 billion earlier this year. This is a move to simplify the Energy Transfer Partners family, which will make the MLP even more attractive to investors. Recall that Williams Cos. (NYSE: WMB) started simplifying its structure last year by buying up Access Midstream Partners.
Energy Transfer Partners also has a strong network of gas stations that allows for some synergies. In 2012 it bought up the gas station company Sunoco for $5 billion for its pipelines, but it also got 5,000 Sunoco stores.
Then in 2014, Energy Transfer Partners bought up the Texas-based gas station retailer Susser Holdings for $2 billion. The plan is to move its Sunoco stations into its Susser subsidiary to create a gas station powerhouse that Energy Transfer Partners will own but not operate. And as we know, low gas prices means more driving, which is great news for gas stations.
No. 2 MLP Play for Low Oil: Spectra Energy Partners LP (NYSE: SEP)
Spectra Energy Partners, which is a $16 billion market cap MLP and pays a 4.4% distribution yield. Spectra Energy Partners has upped its distribution for eight straight years now. It also has a strong balance sheet.
It is actually one of the few MLPs with a large number of projects still in the works, one of which includes increasing the supply of natural gas to the Northeast.
Back in 2013, Spectra Energy (NYSE: SE) had the foresight to transfer all its gas assets to Spectra Energy Partners — which positioned it as one of the largest MLPs around.
But the real reason I like Spectra Energy Partners is that it has the least commodity exposure of the major MLPs. Some 95% of its income is generated from long-term fixed contracts.
No. 3 MLP Play for Low Oil: Boardwalk Pipeline Partners LP (NYSE: BWP)
Boardwalk Pipeline Partners is another MLP that hasn’t gotten much love of late. It has nearly 15,000 miles of pipelines across some of the major U.S. shale plays, including the Eagle Ford, Barnett and Haynesville shales. Its distribution yield comes in at 2.4%.
It’s one of the smaller MLPs, with a $4 billion market cap, but I see this MLP as an undervalued play in the industry. Units took a beating when the MLP cut its distribution in 2014; the units are down nearly 20% over the last six months. Regardless, Boardwalk Pipeline Partners has been paying a dividend for nine years.
Since early 2014, Boardwalk has been focusing on bringing new projects to market. But more importantly, it has been boosting its fee-based businesses — which is its “toll road” business that collects money regardless of oil prices.
The conglomerate Loews (NYSE: L) owns 53% of the MLP, which is a positive. Loews is a $16 billion holding company with other investments in the likes of Diamond Offshore Drilling (NYSE: DO).
The beauty of Boardwalk Pipeline Partners is that its balance sheet is relatively strong. The backing of Loewsallows the MLP to maintain an investment-grade credit rating and source a lower cost of capital compared to other MLPs.
In closing, MLPs are great ways to collect income, but the midstream players are also great ways to avoid oil price volatility. If oil prices do take another leg down, these MLPs should remain insulated, especially compared to oil production companies like ExxonMobil (NYSE: XOM).
Saudi Arabia’s Plot Backfires!
When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.