Over the last few years, most of the news about master limited partnerships (MLPs) hasn’t exactly been great. From lower energy prices to tax-reform, MLPs have been hit hard from all sides. Thanks to bankruptcies, private equity buyouts, and simplification transactions, the number of MLPs has shrunk considerably.
Since the Alerian Index — the main benchmark for the midstream sector — hit its peak back in 2014, there have been more than 80 different MLPs that have disappeared from U.S. exchanges. And if Elliott Management gets its way, MPLX (NYSE:MPLX) will get added to that list.
But despite the doom and gloom for the sector, there are still top-notch MLPs doing what they have always done. And that’s churn-out steady and high distributions for their unitholders. With more capital chasing fewer tickers, these top-notch MLPs have only gotten more desirable in recent quarters. For investors, there are still plenty of reasons to own the asset class. The trick now is finding which ones are worthy of your dollars.
With that, here are three MLPs to buy today.
Magellan Midstream Partners, L.P. (MMP)
Dividend Yield: 6.10%
If there’s one firm that continues to get the MLP structure right, it has to be Magellan Midstream Partners, L.P. (NYSE:MMP). MMP has a long history of doing right by its unitholders and the reason for that continues to be management’s conservative nature.
Magellan’s focus is on crude oil and features one of the largest systems in the country dedicated to the fuel. Roughly half of the nation’s total refining capacity — either going into refineries or coming out to end-users — can tap into one of MMP’s 11,000+ miles worth of pipelines, terminals, or storage farms.
Magellan has stuck to the tried and true faucet of midstream — and that’s using a fee-based business model. MMP is one of the few MLPs that have a “toll road” mentality and collect a steady check based on the volumes through its pipelines. Commodity-price risk is non-existent.
Because of that focus, MMP has continued to be an income stalwart in the sector. Magellan has increased its distribution every year for 19 consecutive years, and given its strong coverage ratio, number 20 could be coming down the pike as well.
Even more so, when you consider than MMP has about $1.25 billion worth of expansion projects on its docket coming online sooner than later. Here again, the focus is on boring toll road-like fees. These projects should allow Magellan to boost distribution by about 5%.
With a current 6.10% yield and strong prospects, MMP is an MLP that has thrown out with the bathwater.
Plains All American Pipeline (PAA)
Dividend Yield: 6.72%
When it comes to MLPs, the strength of the parent or sponsoring firm can make all the difference. It can also hurt as well. Both of those scenarios have applied to Plains All American Pipeline (NYSE:PAA).
PAA is one of the elder statesmen among MLPs and its asset base is large, stretching all the way from Canada down to Gulf Coast refiners. Thanks to a few years of shifting those assets and reducing debt, like previously mentioned Magellan, the bulk of those assets now come with fee-based toll road-like revenues. Today, PAA has one of the more conservative balance sheets, coverage ratios, and cash flow generation in the MLP sector.
The current problem for Plains comes from its parent Occidental Petroleum (NYSE:OXY). OXY, in its recent takeover bid for rival Anadarko, has been forced to sell a lot of stuff in order to make it happen. Sadly, that has included selling a lot of Plains units. That has put pressure on the MLP and caused it to drift lower.
But that drift could make PAA a steal for income seekers — socially with that juicy 6.72% yield.
Right now, PAA can be had for just 7.5 times its cash flows. Meanwhile, its system manages to generate double the amount of cash it needs for its distributions. Even better, it’s still finding avenues for growth with five new projects on its docket including a key Permian pipeline partnered with Exxon (NYSE:XOM). Management believes that these projects should allow PAA to grow its payout by around 5% per year going forward.
While PAA has suffered, the dip may not be justified given its potential. That makes it one of the best MLPs to buy today.
Energy Transfer (ETE)
Dividend Yield: 9.63%
There are MLPs and then there MLPs. Energy Transfer (NYSE:ETE) certainly fits into the latter camp. Founders Kelcy Warren and Ray Davis built ET into one of the largest MLPS and midstream firms in the country with an asset base that can’t be beat. However, these days, investors aren’t exactly treating ET like the king it once was.
Part of that has to do with its simplification process. Energy Transfer was an alphabet soup of many smaller MLPs. Over the last couple of years, ETE has transformed itself via buyouts and acquisitions of these units. That has left some investors cold. As has the MLP structure itself. While several other MLPS have gone on to become C-Corps, Warren has resisted the call. Mostly due to the large annual tax bill from his hefty slog of unit ownership. That has resulted in ET under-performing many rivals in a big way.
For investors looking at the MLP today, however, there could be an opportunity in that big 9.49% yield. For one thing, ET has started to successfully live within its means and its system now generates nearly 2x its distribution in cash flows. Moreover, new projects continue to be internally funded from cash flows rather than debt. This includes its recent $5 billion “bolt-on” acquisition of SemGroup (NYSE:SEMG). Ultimately, ETE still is on a path to grow its distribution further. And yet, Energy Transfer is now trading for peanuts when compared to many rivals.
For investors, units of the MLP could be a major bargain and offer the ability to clip a high yield relatively risk-free.
At the time of writing, Aaron Levitt did not own shares in any stocks mentioned.