For investors seeking high yields, it’s hard to overlook master limited partnerships (MLPs) and their eye-popping distributions — particularly in the booming energy sector.
But although most energy MLPs blow away bonds (and most dividend stocks) with their high yields and tax advantages, MLPs aren’t a one-size-fits-all asset.
First a few facts: MLPs are similar to publicly traded real estate investment trusts (REITs) in that they’re structured a certain way that creates tax advantages. In return, they must return certain amounts of income back to shareholders.
However, the tax advantages of MLPs don’t necessarily extend to shareholders — the tax reporting requirements can also be more complex. And while REITs are required to distribute 90% of their income to shareholders, MLPs are only required to distribute the amounts set forth in the partnership agreement — although they can (and often do) increase that amount.
The lion’s share of high-yielding MLPs can be found in the energy sector, so let’s look at a few choices for those looking to tap the partnership well for income.
High-Yield Energy MLPs – BreitBurn Energy Partners LP (BBEP)
Segment: Upstream
Current Yield: 10.3%
BreitBurn Energy Partners (BBEP) is an upstream (exploration & production) MLP that is strategically aligned to benefit from increased oil production as well as growth through acquisition. BBEP focuses primarily on exploration for new sources of oil, and the company is benefiting from the fracking boom.
Upstream MLPs grow in two ways: by acquiring energy producing assets and making capital investments to spur organic growth. Breitburn is no exception. BBEP recently inked a $3 billion deal to acquire QR Energy LP (QRE) — on the heels of last year’s acquisitions that totaled some $1.2 billion. Acquisitions will continue to be an engine of growth for BBEP moving forward, but the company will spend more than $325 million this year on E&P in fiscal 2014.
Upstream MLPs like BBEP tend to have higher distribution yields (essentially the MLP equivalent of dividends) than their midstream and downstream brethren because they pass through most of their income to shareholders. BreitBurn’s yield is more than 10% — though part of that has come as a result of a sharp 15% decline in shares over the past month. Still, BBEP has increased distributions by nearly 30% in the past five years, and its acquisition strategy should have it back on the upswing longer-term.
Income investors also should note that BBEP pays out distributions monthly rather than quarterly, a bonus for fiscal planning.
High-Yield Energy MLPs – Northern Tier Energy LP (NTI)
Segment: Downstream
Current Yield: 8.9%
Northern Tier Energy LP (NTI) owns refinery and pipeline assets, as well as more than 160 SuperAmerica retail convenience stores in Minnesota and Wisconsin.
The crown jewel of its operations is its 89,500-barrels-per-day refinery in St. Paul Park, Minnesota, which can process light, heavy, sweet and sour crude oil into higher margin refined products. Refinery location is increasingly important because Canadian crude oil is less expensive than the benchmark West Texas Intermediate.
One thing that sets NTI apart from most of its peers is that it is a “variable distribution” MLP: quarterly distributions are paid out from the “crack spread” — the difference between the price of crude and what NTI can get for refined products.
Access to less expensive Canadian crude and efficient refining operations is helping NTI boost margins. Income investors interested in NTI must be prepared for significant volatility in those distributions, however.
High-Yield Energy MLPs – Energy Transfer Partners (ETP)
Segment: Midstream
Current Yield: 5.9%
Energy Transfer Partners (ETP) is focused on midstream operations, which includes gathering, compressing, blending, storing and marketing natural gas from shale formations in Texas, Louisiana, New Mexico and West Virginia. The company also owns and operates natural gas pipelines — particularly important given the meteoric rise in shale gas production in recent years.
But we probably recognize the Dallas-based company for becoming the parent of Sunoco in 2012. This is news now for two reasons: Susser Petroleum Partners (SUSP) — the convenience store group ETP acquired for $1.8 billion in April — will take on the Sunoco name and become the parent of ETP’s retail operations. Second, SUSP will change to SUN later this year, returning the Sunoco name to the New York Stock Exchange.
ETP is the lowest yielder on this list, but that’s thanks in part to share prices that have steadily risen by about 50% over the past two years.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
