 | MARKET CONDITIONS You can't talk about investing in pipelines without knowing something about master limited partnerships (or "MLPs"). Below we'll cover the most important aspects of MLPs that investors need to understand. But you should never invest in one without checking first with a tax professional. I don't recommend paying much more than about 10 times distributable cash flow or less than 4% above the current yield of the 10-year Treasury bond. |
There are three important attributes you must know about master limited partnerships.
First, they don't pay corporate taxes as long as 90% of their revenue is generated by "qualifying sources," like pipelines and other energy industry assets. Instead, they pay a minimum quarterly distribution as determined by the document that establishes the partnership. DCP Midstream Partners (DPM), for example, has a minimum required distribution of $0.35 per quarter, or $1.40 per year. Currently, it's paying $0.67 per quarter, or $2.68 per year. So it's almost double the minimum required distribution.
Second, most of an MLP's cash distributions will qualify as "return of capital." In most cases, you can defer the payment of taxes on return of capital distributions until you sell your MLP shares (commonly called units). In most cases, MLPs are not appropriate for tax-advantaged retirement accounts, like IRAs. If you put an MLP into a retirement account, you can wind up incurring a new tax liability called unrelated business taxable income (UBTI). Ask a tax professional about UBTI before attempting to put an MLP into an IRA or other retirement account.
Third, MLPs are managed by general partners (or GPs). The GP usually owns a 1% or 2% stake, as well as some of the limited partner units. DCP Midstream, LLC owns a 1% general partner interest and a 26% limited partner interest on DPM.
Like most general partners, DCP Midstream also owns incentive distribution rights (IDRs) on DPM. IDRs give the general partner of an MLP an incentive to grow the MLP's limited partner cash distributions. IDRs allow the general partner's share of cash distributions to rise as it increases the limited partner distributions beyond certain milestones. The GP can wind up earning more than half of the distributable cash flow. That usually takes many years to achieve, and the distributions to limited partners must increase dramatically before it can happen.
When you buy units (like "shares") of a publicly traded MLP, you become a limited partner (or LP). As an LP, there are a strict set of tax advantages (and pitfalls) you should be aware of.
Tax Advantages of Owning an MLP
When you own an MLP, you receive a special tax form from the IRS called a Schedule K-1. Schedule K-1 has three sections. In the first and second sections, you report information to identify the partnership and yourself. You report your income, deductions, credits, and other important items in the third section of Schedule K-1. Consult a tax professional to help you with this form if it doesn't make sense to you.
If you choose to invest in a Master Limited Partnership, the cost basis of your units will adjust up or down each year. The amount and direction of the adjustment depends on a few different variables: the level of cash distributions (if any), taxable income, and deductions (depreciation), which you'll report in section three of the Schedule K-1.
The tax advantages for MLP investors can be very good. For example, the cash distributions you get will likely be classified as return of capital. It's unlikely you'll incur a tax liability related to return of capital distributions until you sell your MLP.
Deferring taxes can work out quite well. In some cases, you might not have to pay the tax at all... According to the website of the National Association of Publicly Traded Partnerships (naptp.org), "As long as your adjusted basis is above zero, tax on your distributions is deferred until you sell your units." Moreover, "if a unit holder dies and the units pass to his heirs the prior distributions are not taxed."
Imagine earning a great income in the last couple decades of your life, incurring no tax liability on it, and then passing the units along to your heirs who will incur no liability on your distributions, either.
Tax Pitfalls of Owning an MLP
There are potential tax pitfalls in owning MLPs, too... If you're a young person, you might want to think twice about owning an MLP for too long.
Notice in that quote from the NAPTP above, where it says, "as long as your adjusted basis is above zero." Basis means your cost basis, or how much you paid for your MLP units. When you receive a distribution that's qualified as return of capital, it isn't counted as income but it does reduce your cost basis.
For example, if you paid $20 a share and receive a $1 return of capital distribution, your new cost basis is $19 for future tax purposes. So after $20 in distributions, your cost basis goes to zero. When that happens, all future distributions paid to you are no longer sheltered as return of capital, but instead become fully taxable. So when an MLP's cost basis gets to zero, one of the primary reasons for owning it disappears.
So if you're young, invest in an MLP, and own it for a long time, your adjusted cost basis could go below zero. If that happens, you could incur a huge tax liability when you sell.
While MLPs might be appropriate for retired investors, you must be careful about putting MLPs into a retirement account. The problem is what's known as "unrelated business taxable income" (or UBTI). If it's determined that your MLP distributions count as UBTI, you may have to pay tax on your retirement account.
Again... It's very important to understand the tax implications of investing in MLPs. I highly recommend seeking the advice of a tax professional, preferably a certified public accountant or licensed attorney with years of experience in taxes, before jumping in to any position.
Our Proprietary Method for Finding MLP Investments That Consistently Create Shareholder Value
Once you've decided you want to invest in an MLP, then what? How do you find a company with a safe dividend, run by a management team that treats unit holders well?
Well, it can be complicated. MLPs all report their results a little differently. They produce and transport several types of commodities. So they're always using different measurements like cubic feet, barrels, gallons, tons, etc. That makes it hard to compare them in an apples-to-apples fashion.
One of the hardest jobs investors have is figuring out if management is doing the right thing for the business. By tracking management's effectiveness at long-term wealth creation, our seven-step proprietary model helps investors do just that. And it provides us with a potentially durable competitive advantage over other MLP investors.
We want MLPs with a proven ability to grow their net worth by at least as much as the amount of cash flow they keep. If the net worth grows by the same amount as retained cash, management is at least treading water and not destroying value. If net worth can grow by more than the retained cash, it's increasing shareholder value.
For example, if a company makes $10 a share in cash, we want to see as little of that cash retained as possible. For every $1 retained, we want to see more than $1 of increase in net worth.
Our criteria for selecting the best MLP investments boils down to seven key questions. The questions are designed to find those MLPs that do the best job of creating value and income for investors. Some answers are short. Some are long. But all are complete and tell you what you need to know to understand how each MLP you analyze can provide you with a growing, high-yield, tax-advantaged income for several years.
MLP Selection Criteria
Pipeline MLPs can be an excellent source of current, tax-advantaged income and long-term capital appreciation. But they are also complex business structures that can be very difficult to evaluate and compare. The following seven key questions help us identify the highest-quality MLPs at any given time.
There are six stocks that fit our MLP criteria. Just because they fit the model doesn't mean you should buy them immediately. It means they create shareholder value and should be bought when the price is right.
Keep in mind these companies may seem like complex businesses. But they all boil down to two main businesses: transportation and storage of energy products. Let's start with our No. 1 MLP recommendation.
Earn an 8% Yield in This "Boring" Energy Stock
Energy Transfer Partners (NYSE: ETP) is one of the largest natural gas pipeline MLPs in the country. It has $15.5 billion in assets and a market cap over $10 billion.
Energy Transfer wholly or partially owns and operates 23,500 miles of natural gas and NGL pipelines in the Northeast, Midwest, and Gulf Coast regions of the U.S. It also owns natural gas storage and distribution terminals and natural gas processing facilities. And as you'll see below, it's becoming a major presence in the oil pipeline business, too.
Energy Transfer has four main businesses: Intrastate, interstate, midstream, and natural gas liquids. (Intrastate means pipelines within a single state's borders. Interstate means pipelines that cross state borders.) It's adding a fifth business later this year. (More details on that in a minute.)
Intrastate Pipeline Business
Energy Transfer's biggest business is its intrastate pipeline business. This business transports natural gas within the state of Texas. It's the largest intrastate natural gas pipeline system in the U.S., with about 8,300 miles of natural gas pipelines. These pipelines move natural gas from some major gas-producing regions in Texas to major metropolitan and industrial consumption areas in the state. They also connect to other pipeline systems that serve areas throughout the U.S.
Interstate Pipeline Business
Energy Transfer's second-biggest business is its interstate pipeline business. This business moves natural gas around the country, frequently crossing state lines. It's roughly 8,500 miles of fully and partially ETP-owned pipelines in the Southeast, Northeast, and the Midwest.
The biggest pipeline system in Energy Transfer's interstate business is the Transwestern Pipeline. It's about 2,700 miles of pipeline with various capacities from 1.225 billion cubic feet per day to 1.61 billion cubic feet per day. Transwestern carries gas from major producing basins in Texas, New Mexico, and Oklahoma to markets in the Midwest, Texas, Arizona, New Mexico, Nevada, and California.
ETP also owns a 50% stake in the 5,500-mile Florida Gas Transmission system (pipeline giant Kinder Morgan owns the other half). Florida Gas Transmission is the dominant natural gas pipeline system in Florida. It delivered 63% of the natural gas consumed in Florida in 2010, the latest year for which we have data. It has more than 60 connections with intrastate and interstate pipeline systems.
Midstream Pipeline Business
Energy Transfer's third-largest business is its midstream pipeline business. Midstream owns and operates about 7,400 miles of natural gas gathering pipelines, as well as 28 facilities for processing, treating, and conditioning natural gas. If you think of pipelines like roads, ETP's interstate and intrastate systems are the highways and main streets. Midstream gathering pipelines are the backstreets and side roads. They gather gas where it's produced. Then they transport it to natural-gas-processing facilities. (Processing separates byproducts and impurities from natural gas.)
Natural Gas Liquids Business
Energy Transfer's smallest business is its natural gas liquids business... which processes, transports, and stores NGLs. Most of Energy Transfer's NGL business is done through its 70% stake in Lone Star NGL. The biggest asset in this business is the 1,066-mile West Texas NGL pipeline. The pipeline has a total capacity of 144,000 barrels of NGLs per day. Lone Star also has a 43 million barrel NGL storage facility near the Gulf coast in Mont Belvieu, Texas. (U.S. NGL demand is about 2.4 million barrels per day.) Mont Belvieu is home to one of the largest NGL storage and trading complexes in North America. If you want to grow in the NGL business, this is the place to be.
As I mentioned above, Energy Transfer's new fifth business, its oil pipelines business is a big source of revenue as well. ETP recently closed on its $5.3 billion acquisition of Sunoco (NYSE: SUN). ETP now has control of Sunoco's 32.4% interest in Sunoco Logistics Partners (NYSE: SXL).
SXL is an oil and refined products pipeline MLP. (Refined products are gasoline, diesel fuel, jet fuel, and other products that come from refining crude oil.) It's the only crude oil carrier with a major pipeline extending from the middle of one of the biggest oil discoveries in U.S. history straight to the Gulf Coast. The discovery is the Cline shale in West Texas. Cline is located in the Permian Basin; which generates 20% of U.S. oil production.
ETP will also receive Sunoco's 2% general partner interest and incentive distribution rights (or "IDRs") in SXL. Incentive distribution rights allow the general partner to earn larger amounts of SXL's distributable cash flow as the limited partner distributions grow. IDRs exist to give the general partner an incentive to grow the limited partner's distributions. So IDRs can make the general partner's income grow faster than the limited partner's income.
Like Energy Transfer and many other pipeline companies, SXL isn't just in one business. It's in several related energy transportation and storage businesses with more than 7,900 miles of pipelines and 39 million barrels of storage in the U.S. It's a lot of moving parts, but SXL's basic services are the same as all the other pipeline companies: transportation and storage of energy products. Now let's see how Energy Transfer stacks up against our MLP criteria.
1. What are the prospects for future growth?
Future growth looks promising for ETP. Ever since Energy Transfer announced it was buying Sunoco, growth prospects for SXL improved. And with a controlling stake in SXL, ETP grows faster when SLX grows faster. As part of a bigger company, it'll be easier to get the equity and debt capital to pay for new pipelines and expansions of existing pipelines. It will also be able to take on bigger projects than before.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. As of mid-2012, 69% of ETP's gross profit is fee-based. So only 31% is exposed to commodity prices.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. ETP generates net cash flow from operations every quarter. In the four quarters ending June 30, 2012, it generated $1.3 billion of net cash flow from operations. It's very stable. This is one reason why it's a great investment. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Not recently. But that could change. There are several acquisitions and growth projects which could result in higher distributable cash flow. And the company is predicting this will result in about 6% higher distributions by late 2013. As of October 2012, ETP pays out an 8.4% dividend yield.
5. Are distributions being made in excess of distributable cash flow from operations?
Like most MLPs, ETP might distribute more than its distributable cash flow every several quarters. ETP's goal is to distribute 100% of its distributable cash flow. Every now and then, it will distribute a little more or less than that. But over the long haul, it'll distribute 100% of its distributable cash flow.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. As we said in the previous question, Energy Transfer distributes 100% of its distributable cash flow.
7. Is management generating an acceptable return on any cash it retains?
Energy Transfer pays out 100% of its distributable cash flow. So it retains no cash. Still, it's able to increase net worth value consistently, because management is very good at investing borrowed money. During the eight quarters through June 30, 2012, it increased net worth by nearly 18%.
BUY Energy Transfer Partners (NYSE: ETP) up to $54.
One of the Best Income Stocks In the World
Enterprise Products Partners L.P. (NYSE: EPD) is the largest publicly traded energy partnership in the United States. It owns 50,700 miles of pipelines for transporting natural gas, NGLs, crude oil, refined products (like gasoline, diesel fuel, and jet fuel), and petrochemicals.
EPD has pipelines connected to approximately 95% of the crude oil refining capacity located east of the Rocky Mountains. And it is a key or sole supplier for every ethelyne steam cracker in the country. These plants produce ethelyne from the ethane NGL They're the largest consumers of natural gas liquids in the United States. This puts Enterprise in a good position to profit from the increasing popularity of valuable NGL production.
The company owns 190 million barrels of total storage capacity for storing NGLs, refined products, and crude oil. It owns 14 billion cubic feet of natural gas storage. And it owns 25 natural gas processing facilities, and 20 facilities for processing NGLs and propylene (a petrochemical).
Enterprise doesn't only ship energy products through pipelines. it also ships them on boats. It owns 125 barges for shipping various energy products and 58 tow boats for towing the barges. Enterprise also owns import/export terminals in the Houston Ship Channel in the Gulf of Mexico. Those terminals can move a total of 21,000 barrels of NGL, crude oil, and other liquids per hour.
Enterprise Products Partners has assets are all over the United States. This company is an indispensable part of the country's energy infrastructure. Our standard of living in the United States would be a lot lower without EPD's critical energy transportation, processing, and storage assets.
Enterprise Products Partners is a little different than most MLPs. As we described earlier in this report, most MLPs are run by a general partner. The general partner earns a growing share of the distributable cash flow of the MLP.
But EPD has no general partner. So 100% of the growth in distributable cash flow goes to the limited partners. That's you, the limited partner unit holder. If we could re-design the entire MLP sector, we'd probably make every investment like this. But even with general partners, some management teams do an excellent job of creating value and growing dividends for the limited partner unit holder. Now let's see how it stacks up against our MLP criteria.
1. What are the prospects for future growth?
Excellent. As of mid-2012, EPD has $7.5 billion in new growth projects underway. It's spending $4 billion in the Eagle Ford shale in Texas to expand its pipelines and natural gas processing capacity. It's currently expanding NGL pipelines throughout the American West. And it's proposed a new 1,230 mile pipeline to transport ethane from the Marcellus/Utica shale areas to the Gulf Coast.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. EPD doesn't have much commodity price risk, and it's consistently reducing whatever little it does have. In 2012, it expects 77% of gross profits from fee-based contracts (remember... fee based contracts = no commodity exposure). It's expecting to increase that to 80% in 2013.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. Last year, it generated $3.33 billion in net cash flow from operations. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. As of fall 2012, EPD has raised its annual distribution every year for 13 years in a row and pays a 4.7% dividend yield.
5. Are distributions being made in excess of distributable cash flow from operations?
No. EPD is a big, blue-chip pipeline and processing company. It consistently generates plenty of cash flow and pursues a policy of covering its payouts with more than adequate cash generation. This makes its dividend very safe.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In 2011, it distributed 65% of its distributable cash flow from operations. This is a strong, stable dividend, with plenty of coverage.
7. Is management generating an acceptable return on any cash it retains?
Recently, no. In the eight quarters through Jun 30, 2012, net worth fell by about $0.14 for every $1 retained. We expect this to turn around soon, as management continues to invest in new growth projects.
As you can see, Enterprise Products Partners is a large, growing company. And it generates a reliable, growing stream of income for investors. At this time of EPD is well above our maximum buy price of $26 per share. Keep it on your radar. Enterprise Products Partners, L.P. is one of the most well-known MLPs. It doesn't drop into buy range often. But when it does, pounce and buy enthusiastically.
A Dominant Player in a Little-Known Corner of the Energy Industry
DCP Midstream Partners L.P. (NYSE: DPM) a primarily player in natural gas gathering and processing. Remember, natural gas processing is an essential step in transporting natural gas to customers across the country. When raw natural gas comes out of the ground, it contains impurities and heavy hydrocarbons (the NGLs we discussed earlier) that, if not removed, cause blockages in the transportation pipelines. Once separated out (through a process called "fractionation"), NGLs – butane, propane, and ethane are valuable in and of themselves.
DPM owns about 6,000 miles of natural gas and NGL pipelines. It also owns 12 natural gas processing plants, and four fractionation plants. Processing is DPM's biggest business. About 71% of its gross profit comes from natural gas processing. Another 15% is from moving and storing NGLs. And another 14% comes from wholesale propane sales.
DPM's general partner is DCP Midstream, LLC. DCP Midstream is the largest gatherer and processor of NGLs in the country. It's a huge company, with 56,000 miles of pipeline, 49 processing plants and eight fractionation facilities. DPM's association with its general partner helps give it access to new investments it might not otherwise be able to make, since it can sometimes participate in co-investments with its much larger parent and general partner.
DCP Midstream LLC is a 50/50 joint venture in Spectra Energy and Phillips 66. Spectra is a large natural gas pipeline company. Phillips 66 is a large, diversified energy company. The joint venture owns a 2% general partner interest and a 26% limited partner interest.
Between DCP Midstream, LLC, Spectra, and Phillips 66, DPM can draw on the expertise, experience and opportunities from three major players in the U.S. domestic energy market. It's like having three "rich uncles" helping you out in a business venture. We think it makes DCP Midstream L.P. a better investment than most other MLPs. Now let's see how DCP stacks up against our MLP criteria.
1. What are the prospects for future growth?
Over the next three years (2012-2015), DPM estimates it will make $3 billion worth of new growth investments with its general partner alone. Today, about 15% of DPM's gross profit comes from moving and storing NGLs. By 2015, it expects that will grow to as much as 45% as it ramps up growth in its NGL business.
As of June 2012, DPM had identified seven different pipeline and processing projects scheduled to begin generating revenues between 2012 and the end of 2014. Most are scheduled to be in operation by mid-2013. They'll all produce profits and help fund higher limited partner cash distributions in the next two to three years.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. For 2011, DPM's gross margin was 60% fee-based and 40% commodity-price-based. But most of that commodity price exposure is hedged (protected from risk). Just 12% of DPM's gross margin this year is exposed to commodity prices and unhedged. That's very minimal exposure, and should give unit holders peace of mind that the source of their cash distributions is well-protected.
By 2015, DPM expects its gross margin to be as high as 80% fee-based. Much of the remaining portion will be hedged. I doubt DPM will ever have much direct exposure to commodity prices. That should help keep a steady stream of cash distributions coming to unit holders no matter what the commodity does.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. In 2011, it generated $204.1 million of net cash flow from operations. And it generated positive net cash flow from operations in nine of the last 10 quarters. This is strong. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. DPM declared its first quarterly cash distribution in February 2006. It has raised its cash distribution every year since. Since going public in 2005, DPM has raised its cash distribution 18 out of 26 quarters. It currently yields 6%. Management projects it will increase its cash distribution by about $0.01 per quarter during 2012 and 2013.
5. Are distributions being made in excess of distributable cash flow from operations?
No. Like most MLPs, DPM might distribute more than its distributable cash flow every several quarters. But on an annual basis, DPM consistently distributes less than its distributable cash flow.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In the eight quarters through June 30, DPM distributed 84% of distributable cash flow from operations. That's a great number. It'll move up and down over time, but we expect it to remain fairly high overall. As you'll see in our answer to question No. 7, it's good that DPM retains the other 16% of its distributable cash flow rather than paying more of it out to shareholders as a dividend.
7. Is management generating an acceptable return on any cash it retains?
Yes. For every $1 it retained in the eight quarters through June 30, DPM grew unit holder equity by $8.80. That means unit holders basically made 8.8 times their money on their investment. That's what DPM has done recently with the 16% of distributable cash flow it's retained in the business. This is a phenomenal performance.
DPM won't always be able to create $8.80 of shareholder value for every $1 it retains. But it should be able to grow net worth faster than other MLPs because of the extra opportunities it'll be afforded by its general partner like the "drop-down" transactions and long-term contracts for the use of DCP Midstream, LLC's pipelines and processing facilities.
We normally don't recommend paying more than 10 times distributable cash flow from operations for MLPs. Our experience tells us that's a cheap price. Due to its massive wealth-creation ability, we're willing to recommend you pay as much as 12 times distributable cash flow from operations for DCP Midstream.
BUY DCP Midstream Partners L.P. (NYSE: DPM) up to $44.
One of the Biggest Natural Gas Processors in the Country
ONEOK Partners L.P. (NYSE: OKS) is one of the biggest publicly traded master limited partnerships in the U.S. OKS is in three businesses: natural gas gathering and processing, natural gas pipelines, and natural gas liquids (NGLs). And it's one of the biggest U.S. companies in all three businesses.
OKS owns 15,900 miles of pipelines for gathering natural gas from six producing basins in Oklahoma, Kansas, North Dakota, and Wyoming, 14 active processing plants with the capacity to process 860 million cubic feet per day of natural gas and 7,100 miles of transportation pipelines with a peak capacity of 6.5 billion cubic feet her pay. Its transportation business is mostly fee-based, and has little exposure to commodity price risk.
It also owns one of the biggest NGL systems in the country. OKS' NGL system connects natural gas liquids supply in the Mid-Continental and Rocky Mountain regions with key market centers in the Gulf Coast and around Oklahoma. OKS' NGL gathering pipeline system connects to about 100 different natural gas processing plants... 90% of which are in the Mid-Continental region (Texas, Oklahoma, Kansas). It also includes:
OKS is already the largest independent processor of natural gas in the Bakken region. It's got four existing processing plants in the area, and its planning four new ones. And it owns 50% of the Northern Border pipeline, which goes right through this area. The oil in this region also has a very high NGL content, of 8-13 gallons per thousand cubic feet of natural gas.
One of OKS' biggest new investments in the Bakken region is the $1.8 billion it's planning to spend on a 1,300-mile crude oil pipeline in the Bakken region, called the Bakken Crude Express Pipeline. Construction is scheduled to begin in late 2013/early 2014. It should be completed by early 2015. It'll extend from North Dakota, south through Wyoming to Colorado, then southeast through Kansas to Cushing, Oklahoma. More than 80% of this new pipeline will parallel OKS' existing and planned NGL pipelines.
OKS' general partner is owned by its parent company, ONEOK (NYSE: OKE). OKE is a Tulsa, Oklahoma-based natural gas utility serving Texas, Oklahoma, and Kansas. It owns a 2% general partner interest and 100% of OKS' 11.8 million outstanding Class B units. (The ones you can buy are the Class A units.) OKE's Class B units give it the right to receive a distribution on its units equal to 110% of limited partner distributions.
OKE is a shareholder-friendly company, so it has waived its right to receive 110% of the limited partnership distributions. I expect it to continue to waive this right for several more years, as the company continues to grow. Let's see how it stacks up against our MLP criteria.
1. What are the prospects for future growth?
OKS has announced roughly $5.7 billion-$6.6 billion of new growth projects through 2012. As of late August 2012, it had a backlog of more than $2 billion in unannounced growth projects.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. For 2012, OKS expects to generate only about 43% of its profit from sources of revenue exposed to commodity price risk. Much of this risk is hedged with futures contracts. This leaves 57% of revenue free from commodity price risk.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. OKS's cash flow generation is strong. In 2011, it generated $1.13 billion of net cash flow from operations. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. Since the first quarter of 2006, cash distributions have grown at an annual rate of about 8% a year. But that's accelerating... OKS expects to continue with 2.5% per quarter increases in cash distributions through the end of 2012. It expects to deliver 15%-20% annual growth in cash distributions in 2013 and 2014. As of October 2012, OKS pays out a 4.4% dividend yield.
5. Are distributions being made in excess of distributable cash flow from operations?
Overall, no. Like other MLPs on our list, every now and then you'll see a quarter or two where the distribution exceeds distributable cash flow. But most years, distributions will not exceed distributable cash flow.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In the eight quarters ending June 30, 2012, OKS distributed 69% of distributable cash flow. That's a strong number.
7. Is Management generating an acceptable return on any cash it retains?
Yes, it's excellent. For every $1 it retained in the eight quarters ending June 30, 2012, OKS increased unit holder equity by $1.59. That means OKS is able to invest $1 and create $1.59 of unit holder value. Not many companies can do that.
OKS is an excellent investment, with a strong history of creating shareholder value, and providing a steadily increasing income stream. As of October 2012, OKS has been trading below 10 times distributable cash flow per unit – our main criteria for setting maximum buy prices. But we also like to see MLP yields of 4% or higher than the 10-year Treasury yield. We believe that helps reduce the risk of owning MLPs.
OKS is trading at a yield of about 2.65% above the 10-year Treasury yield recently. That's too low. Based on these valuations, we don't recommend opening a position in OKS until the stock drops to $57 or below.
BUY ONEOK Partners L.P. (NYSE: OKS) up to $57.
A Corner of the Energy Boom You Don't Hear Much About
Magellan Midstream Partners (NYSE: MMP) is one of the largest liquids pipeline owners in the U.S. It owns the longest refined petroleum products pipeline system in the country. Refined products include gasoline, diesel fuel, and jet fuel.
Magellan also transports crude oil. Magellan's pipelines distribute products from over 40% of the country's crude oil refining capacity. Magellan also has the capacity to store over 75 million barrels of liquids at various locations around the country. Magellan's pipelines can tap into more than 40% of U.S. refining capacity. It can store over 75 million barrels of petroleum products such as gasoline, diesel fuel, and crude oil.
Magellan's petroleum pipeline system accounts for roughly 75% of its operating profit. Its petroleum storage terminals account for roughly 23% of operating profit. It also owns an ammonia pipeline system that accounts for about 2% of operating profit. MMP's petroleum pipeline system is about 9,600 miles of pipeline that run straight up the middle of the country, from Texas to Minnesota. Connected to this system are 50 storage terminals with 39 million barrels of storage capacity.
Magellan is planning a major new pipeline from the Permian Basin to the Gulf Coast of Texas. At an expected cost of $375 million, it's the largest new growth project in MMP history. The finished, upgraded pipeline will send crude oil from the Permian Basin region to the Gulf Coast. It'll also send refined products (like gasoline and diesel fuel) from the Gulf Coast as far west as El Paso, on the westernmost tip of Texas.
MMP is also proposing to partner up with global energy giant Occidental Petroleum to build a 400-mile crude oil pipeline from Colorado City, Texas to the Texas Gulf Coast area. If the project gets approved, it's expected to be operational by mid-2014.
MMP also owns seven large storage terminals in Cushing, Oklahoma (one of the largest delivery/distribution hubs for crude oil in the world)... Corpus Christi and Galena Park on the Gulf Coast of Texas... Gibson and Marrero, Louisiana Gulf Coast... Wilmington, Delaware... and New Haven, Connecticut. These terminals have a total capacity of 36 million barrels of storage. This is a good business.
MMP also owns 27 storage terminals (totaling 5 million barrels of storage capacity), located along four pipelines owned by other companies, from the Texas Gulf Coast up the east Coast as far north as Virginia, and from Texas northward as far as the Illinois shore of Lake Michigan.
Like Enterprise Products Partners, MMP does not have a general partner. So unit holders will realize 100% of the benefits of growth in distributable cash flow. Now let's see how MMP stacks up against our MLP criteria.
1. What are the prospects for future growth?
Excellent. As of August 2012, Magellan has $700 million worth of new expansion and growth projects currently underway. Another $500 million of new expansion/growth projects are under consideration.
In the last eight years, MMP invested $2.5 billion in new growth projects and acquisitions. That's just over $300 million per year on average. So it's investing at more than double that rate today. The company is currently spending $375 million on the largest single expansion project in its history. There's plenty of growth now at MMP, and plenty more to come in the future.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. As of June 30, 2012, roughly 82% of MMP's operating profit came from fee-based, low-risk businesses with no commodity price risk.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. It's one of the most consistent net cash flow generators. It's generated positive net cash flow from operations every one of the last eight quarters. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. It not only increases annual distributions almost every year but it has increased its distribution every quarter for the last 10 quarters in a row (through the August 2012 distribution). As of October 2012, it pays a dividend yield of 4.3%.
5. Are distributions being made in excess of distributable cash flow from operations?
Like some of our MLPs, Magellan might distribute more than its distributable cash flow every several quarters. But not frequently enough to cause concern about the strength of the dividend.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. MMP paid out 69% of its distributable cash flow in the eight quarters ending June 30, 2012.
7. Is management generating an acceptable return on any cash it retains?
Usually, but not always. For every $1 per share of cash retained in the eight quarters ending June 30, 2012, MMP grew net worth by $0.68. We think Magellan's massive new $375 million crude oil expansion and pipeline reversal project will put its wealth generation squarely in the black.
Overall, when you look at Magellan's history of income generation and its excellent growth prospects, it's a good A.O.P-style investment. It should provide unit holders with a growing income for many years to come.
Magellan Midstream Partners, L.P. doesn't drop into buy range often but when it does, pounce.
At the time, MMP is well above our maximum buy price of $33 per share. Keep an eye on it.
A Desired Giant in Energy Transport and Storage
We've already discussed crude oil carrier Sunoco Logistics Partners (NYSE: SXL) in our section on Energy Transfer Partners. Energy Transfer recently SXL's general partner Sunoco (NYSE: SUN). In fact, the main reason Energy Transfer bought Sunoco was to get control of SXL. Why? Well, just look at SXL's assets. SXL is in several related energy transportation and storage businesses:
The West Texas Gulf pipeline originates in the middle of one of the biggest oil discoveries in U.S. history: the Cline shale in the Permian Basin of west Texas. It stretches from Colorado City, Texas (near the eastern New Mexico border) to its Nederland Terminal storage and distribution facility on the Gulf Coast. (More on Nederland in a minute.)
Cline is still mostly off the world's radar screen... But we know a Texas oil tycoon with decades of experience who thinks Cline will ultimately produce a total of 35 billion barrels of oil, based on current drilling technology and oil prices. That's more than the three largest oil shales in the country (Monterey in California, Bakken in North Dakota, and Eagle Ford in Texas).
The Cline play has already attracted major oil and gas producer Devon Energy. Devon will drill 15 wells on its 500,000-acre position in 2012. We expect that to attract several more major oil companies. All of this attention will grow the Cline region's production and that's great news for SXL.
In late June 2012, SXL announced plans for a new project to transport crude from North and West Texas to the Gulf Coast. The project is called Permian Express, named for the Permian Basin. Permian Express will happen in two phases.
Aside from the West Texas Gulf pipeline and the growth potential it represents, SXL owns another highly valuable asset on the Gulf Coast: its Nederland Terminal. It lies in the heart of the Gulf Coast refining region. Nederland is the destination for SXL's crude oil from North and West Texas. Nederland can deliver up to 2 million barrels per day to any of the following:
1. What are the prospects for future growth?
Now that SXL is controlled by another of our recommendations (Enterprise Products Partners), its prospects for future growth have improved. SXL is now part of a larger, more-focused entity than when it was owned by Sunoco. Given the enormous potential of the Cline shale and SXL's ownership of the Nederland Terminal on the Gulf Coast, we believe SXL's new Permian Express project is likely the beginning of a major growth effort in West Texas.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. About one-third of SXL's 2011 earnings before interest, taxes, depreciation, and amortization (a standard cash flow measure used by some MLPs and companies) was exposed to commodity price risk. As with most of our MLPs, we expect this to stay about where it is or possibly even improve with time.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. SXL has generated positive net cash flow from operations in seven of the eight quarters through March 31, 2012. SXL generated a record $166 million in distributable cash flow in the second quarter of 2012. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. SXL is a world champion at increasing distributions. As of August 2012, it had raised its distribution 29 quarters in a row. That's every quarter for more than seven years in a row.
5. Are distributions being made in excess of distributable cash flow from operations?
No. It distributes a little more than half of its distributable cash flow from operations.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Nearly. In the eight quarters ending June 30, 2012, SXL distributed 46% of its distributable cash flow from operations. The number fluctuates somewhat, but we expect distributions to rise now that SXL is controlled by Energy Transfer (which distributes 100% of its distributable cash flow from operations).
7. Is management generating an acceptable return on any cash it retains?
Not at the moment. For every $1 of distributable cash it retained in the eight quarters ending June 30, 2012, SXL generated $0.96 of net worth. But we expect this number to rise in the near future as new growth projects come online.
Sometimes, MLPs retain more cash to fund new growth efforts. It takes a little time for the new investments to be made and for it to produce a return. Recently, SXL has been retaining more cash than usual to fund new growth efforts. I expect these efforts will generate a good return, eventually. It takes time for pipelines to be built. For now, we're willing to look past the current situation to the future growth prospects represented by the extra retained cash even if it requires us to answer no to this question. I believe we'll be answering yes before long.
Overall, SXL exhibits the characteristics of a safe MLP investment with excellent growth prospects and stacks up well against our model.
BUY Sunoco Logistics Partners L.P. (NYSE: SXL) up to $66 per share.
Please note: If you buy Energy Transfer Partners, you'll automatically be invested in SXL, since ETP owns a controlling stake in SXL. You may not want to "double up."
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The financial results that qualify a stock for our criteria are constantly changing. We think the six companies in profiled here will continue to do what they've done in the past: consistently generate results that (almost always) meet our criteria.
It's normal for our top six MLPs to change from time to time and if one does not currently pass our criteria will get its act together or one that does pass will have a bad year and fall off the radar. Overall, we think we've developed a highly powerful tool that lets us reduce a large and growing number of possible MLP investments down to a small group. For now, keep these six MLPs on your watch list and when they are in buy range... pounce!
That's what investing is all about. It's about understanding the overall trend in place and then doing your homework until you find just the right opportunities to take advantage of that trend. I hope you'll use this information as an important point for building your own MLP portfolio. It can help you earn a large and growing income for years to come.
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INVESTOR TIP
Do the research to find out if your MLP investment offers a DRIP (dividend reinvestment plan). DRIPs can increase your dividend income exponentially with a compounded rate of return.
I wanted to stay focused on MLPs and the criteria you should use to aid in your selection. You must check out Vanguard Natural Resources, LLC (Nasdaq: VNR). VNR is a publicly traded LLC (LLCs are similar to MLPs).
VNR doesn't own stakes in other publicly traded partnerships, so it shouldn't be an additional concern for your tax professional to sort out. Even so, if you put up with any extra paperwork, you can earn high yields and defer tax payments for years. It's a personal decision. For many investors, the benefits outweigh the extra work at tax time.
BUY Vanguard Natural Resources, LLC (Nasdaq: VNR) up to $30 a share
First, they don't pay corporate taxes as long as 90% of their revenue is generated by "qualifying sources," like pipelines and other energy industry assets. Instead, they pay a minimum quarterly distribution as determined by the document that establishes the partnership. DCP Midstream Partners (DPM), for example, has a minimum required distribution of $0.35 per quarter, or $1.40 per year. Currently, it's paying $0.67 per quarter, or $2.68 per year. So it's almost double the minimum required distribution.
Second, most of an MLP's cash distributions will qualify as "return of capital." In most cases, you can defer the payment of taxes on return of capital distributions until you sell your MLP shares (commonly called units). In most cases, MLPs are not appropriate for tax-advantaged retirement accounts, like IRAs. If you put an MLP into a retirement account, you can wind up incurring a new tax liability called unrelated business taxable income (UBTI). Ask a tax professional about UBTI before attempting to put an MLP into an IRA or other retirement account.
Third, MLPs are managed by general partners (or GPs). The GP usually owns a 1% or 2% stake, as well as some of the limited partner units. DCP Midstream, LLC owns a 1% general partner interest and a 26% limited partner interest on DPM.
Like most general partners, DCP Midstream also owns incentive distribution rights (IDRs) on DPM. IDRs give the general partner of an MLP an incentive to grow the MLP's limited partner cash distributions. IDRs allow the general partner's share of cash distributions to rise as it increases the limited partner distributions beyond certain milestones. The GP can wind up earning more than half of the distributable cash flow. That usually takes many years to achieve, and the distributions to limited partners must increase dramatically before it can happen.
When you buy units (like "shares") of a publicly traded MLP, you become a limited partner (or LP). As an LP, there are a strict set of tax advantages (and pitfalls) you should be aware of.
Tax Advantages of Owning an MLP
When you own an MLP, you receive a special tax form from the IRS called a Schedule K-1. Schedule K-1 has three sections. In the first and second sections, you report information to identify the partnership and yourself. You report your income, deductions, credits, and other important items in the third section of Schedule K-1. Consult a tax professional to help you with this form if it doesn't make sense to you.
If you choose to invest in a Master Limited Partnership, the cost basis of your units will adjust up or down each year. The amount and direction of the adjustment depends on a few different variables: the level of cash distributions (if any), taxable income, and deductions (depreciation), which you'll report in section three of the Schedule K-1.
The tax advantages for MLP investors can be very good. For example, the cash distributions you get will likely be classified as return of capital. It's unlikely you'll incur a tax liability related to return of capital distributions until you sell your MLP.
Deferring taxes can work out quite well. In some cases, you might not have to pay the tax at all... According to the website of the National Association of Publicly Traded Partnerships (naptp.org), "As long as your adjusted basis is above zero, tax on your distributions is deferred until you sell your units." Moreover, "if a unit holder dies and the units pass to his heirs the prior distributions are not taxed."
Imagine earning a great income in the last couple decades of your life, incurring no tax liability on it, and then passing the units along to your heirs who will incur no liability on your distributions, either.
Tax Pitfalls of Owning an MLP
There are potential tax pitfalls in owning MLPs, too... If you're a young person, you might want to think twice about owning an MLP for too long.
Notice in that quote from the NAPTP above, where it says, "as long as your adjusted basis is above zero." Basis means your cost basis, or how much you paid for your MLP units. When you receive a distribution that's qualified as return of capital, it isn't counted as income but it does reduce your cost basis.
For example, if you paid $20 a share and receive a $1 return of capital distribution, your new cost basis is $19 for future tax purposes. So after $20 in distributions, your cost basis goes to zero. When that happens, all future distributions paid to you are no longer sheltered as return of capital, but instead become fully taxable. So when an MLP's cost basis gets to zero, one of the primary reasons for owning it disappears.
So if you're young, invest in an MLP, and own it for a long time, your adjusted cost basis could go below zero. If that happens, you could incur a huge tax liability when you sell.
While MLPs might be appropriate for retired investors, you must be careful about putting MLPs into a retirement account. The problem is what's known as "unrelated business taxable income" (or UBTI). If it's determined that your MLP distributions count as UBTI, you may have to pay tax on your retirement account.
Again... It's very important to understand the tax implications of investing in MLPs. I highly recommend seeking the advice of a tax professional, preferably a certified public accountant or licensed attorney with years of experience in taxes, before jumping in to any position.
Our Proprietary Method for Finding MLP Investments That Consistently Create Shareholder Value
Once you've decided you want to invest in an MLP, then what? How do you find a company with a safe dividend, run by a management team that treats unit holders well?
Well, it can be complicated. MLPs all report their results a little differently. They produce and transport several types of commodities. So they're always using different measurements like cubic feet, barrels, gallons, tons, etc. That makes it hard to compare them in an apples-to-apples fashion.
One of the hardest jobs investors have is figuring out if management is doing the right thing for the business. By tracking management's effectiveness at long-term wealth creation, our seven-step proprietary model helps investors do just that. And it provides us with a potentially durable competitive advantage over other MLP investors.
We want MLPs with a proven ability to grow their net worth by at least as much as the amount of cash flow they keep. If the net worth grows by the same amount as retained cash, management is at least treading water and not destroying value. If net worth can grow by more than the retained cash, it's increasing shareholder value.
For example, if a company makes $10 a share in cash, we want to see as little of that cash retained as possible. For every $1 retained, we want to see more than $1 of increase in net worth.
Our criteria for selecting the best MLP investments boils down to seven key questions. The questions are designed to find those MLPs that do the best job of creating value and income for investors. Some answers are short. Some are long. But all are complete and tell you what you need to know to understand how each MLP you analyze can provide you with a growing, high-yield, tax-advantaged income for several years.
MLP Selection Criteria
Pipeline MLPs can be an excellent source of current, tax-advantaged income and long-term capital appreciation. But they are also complex business structures that can be very difficult to evaluate and compare. The following seven key questions help us identify the highest-quality MLPs at any given time.
- What are the prospects for future growth?
- Is there too much commodity price risk in the MLP's revenue stream?
- Does the MLP consistently generate positive net cash flow from operations?
- Does the partnership have a history of increasing annual distributions?
- Are distributions being made in excess of distributable cash flow from operations?
- Does the MLP distribute the majority of its distributable cash flow from operations?
- Is management generating an acceptable return on any cash it retains?
There are six stocks that fit our MLP criteria. Just because they fit the model doesn't mean you should buy them immediately. It means they create shareholder value and should be bought when the price is right.
Keep in mind these companies may seem like complex businesses. But they all boil down to two main businesses: transportation and storage of energy products. Let's start with our No. 1 MLP recommendation.
Earn an 8% Yield in This "Boring" Energy Stock
Energy Transfer Partners (NYSE: ETP) is one of the largest natural gas pipeline MLPs in the country. It has $15.5 billion in assets and a market cap over $10 billion.
Energy Transfer wholly or partially owns and operates 23,500 miles of natural gas and NGL pipelines in the Northeast, Midwest, and Gulf Coast regions of the U.S. It also owns natural gas storage and distribution terminals and natural gas processing facilities. And as you'll see below, it's becoming a major presence in the oil pipeline business, too.
Energy Transfer has four main businesses: Intrastate, interstate, midstream, and natural gas liquids. (Intrastate means pipelines within a single state's borders. Interstate means pipelines that cross state borders.) It's adding a fifth business later this year. (More details on that in a minute.)
Intrastate Pipeline Business
Energy Transfer's biggest business is its intrastate pipeline business. This business transports natural gas within the state of Texas. It's the largest intrastate natural gas pipeline system in the U.S., with about 8,300 miles of natural gas pipelines. These pipelines move natural gas from some major gas-producing regions in Texas to major metropolitan and industrial consumption areas in the state. They also connect to other pipeline systems that serve areas throughout the U.S.
Interstate Pipeline Business
Energy Transfer's second-biggest business is its interstate pipeline business. This business moves natural gas around the country, frequently crossing state lines. It's roughly 8,500 miles of fully and partially ETP-owned pipelines in the Southeast, Northeast, and the Midwest.
The biggest pipeline system in Energy Transfer's interstate business is the Transwestern Pipeline. It's about 2,700 miles of pipeline with various capacities from 1.225 billion cubic feet per day to 1.61 billion cubic feet per day. Transwestern carries gas from major producing basins in Texas, New Mexico, and Oklahoma to markets in the Midwest, Texas, Arizona, New Mexico, Nevada, and California.
ETP also owns a 50% stake in the 5,500-mile Florida Gas Transmission system (pipeline giant Kinder Morgan owns the other half). Florida Gas Transmission is the dominant natural gas pipeline system in Florida. It delivered 63% of the natural gas consumed in Florida in 2010, the latest year for which we have data. It has more than 60 connections with intrastate and interstate pipeline systems.
Midstream Pipeline Business
Energy Transfer's third-largest business is its midstream pipeline business. Midstream owns and operates about 7,400 miles of natural gas gathering pipelines, as well as 28 facilities for processing, treating, and conditioning natural gas. If you think of pipelines like roads, ETP's interstate and intrastate systems are the highways and main streets. Midstream gathering pipelines are the backstreets and side roads. They gather gas where it's produced. Then they transport it to natural-gas-processing facilities. (Processing separates byproducts and impurities from natural gas.)
Natural Gas Liquids Business
Energy Transfer's smallest business is its natural gas liquids business... which processes, transports, and stores NGLs. Most of Energy Transfer's NGL business is done through its 70% stake in Lone Star NGL. The biggest asset in this business is the 1,066-mile West Texas NGL pipeline. The pipeline has a total capacity of 144,000 barrels of NGLs per day. Lone Star also has a 43 million barrel NGL storage facility near the Gulf coast in Mont Belvieu, Texas. (U.S. NGL demand is about 2.4 million barrels per day.) Mont Belvieu is home to one of the largest NGL storage and trading complexes in North America. If you want to grow in the NGL business, this is the place to be.
As I mentioned above, Energy Transfer's new fifth business, its oil pipelines business is a big source of revenue as well. ETP recently closed on its $5.3 billion acquisition of Sunoco (NYSE: SUN). ETP now has control of Sunoco's 32.4% interest in Sunoco Logistics Partners (NYSE: SXL).
SXL is an oil and refined products pipeline MLP. (Refined products are gasoline, diesel fuel, jet fuel, and other products that come from refining crude oil.) It's the only crude oil carrier with a major pipeline extending from the middle of one of the biggest oil discoveries in U.S. history straight to the Gulf Coast. The discovery is the Cline shale in West Texas. Cline is located in the Permian Basin; which generates 20% of U.S. oil production.
ETP will also receive Sunoco's 2% general partner interest and incentive distribution rights (or "IDRs") in SXL. Incentive distribution rights allow the general partner to earn larger amounts of SXL's distributable cash flow as the limited partner distributions grow. IDRs exist to give the general partner an incentive to grow the limited partner's distributions. So IDRs can make the general partner's income grow faster than the limited partner's income.
Like Energy Transfer and many other pipeline companies, SXL isn't just in one business. It's in several related energy transportation and storage businesses with more than 7,900 miles of pipelines and 39 million barrels of storage in the U.S. It's a lot of moving parts, but SXL's basic services are the same as all the other pipeline companies: transportation and storage of energy products. Now let's see how Energy Transfer stacks up against our MLP criteria.
1. What are the prospects for future growth?
Future growth looks promising for ETP. Ever since Energy Transfer announced it was buying Sunoco, growth prospects for SXL improved. And with a controlling stake in SXL, ETP grows faster when SLX grows faster. As part of a bigger company, it'll be easier to get the equity and debt capital to pay for new pipelines and expansions of existing pipelines. It will also be able to take on bigger projects than before.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. As of mid-2012, 69% of ETP's gross profit is fee-based. So only 31% is exposed to commodity prices.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. ETP generates net cash flow from operations every quarter. In the four quarters ending June 30, 2012, it generated $1.3 billion of net cash flow from operations. It's very stable. This is one reason why it's a great investment. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Not recently. But that could change. There are several acquisitions and growth projects which could result in higher distributable cash flow. And the company is predicting this will result in about 6% higher distributions by late 2013. As of October 2012, ETP pays out an 8.4% dividend yield.
5. Are distributions being made in excess of distributable cash flow from operations?
Like most MLPs, ETP might distribute more than its distributable cash flow every several quarters. ETP's goal is to distribute 100% of its distributable cash flow. Every now and then, it will distribute a little more or less than that. But over the long haul, it'll distribute 100% of its distributable cash flow.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. As we said in the previous question, Energy Transfer distributes 100% of its distributable cash flow.
7. Is management generating an acceptable return on any cash it retains?
Energy Transfer pays out 100% of its distributable cash flow. So it retains no cash. Still, it's able to increase net worth value consistently, because management is very good at investing borrowed money. During the eight quarters through June 30, 2012, it increased net worth by nearly 18%.
BUY Energy Transfer Partners (NYSE: ETP) up to $54.
One of the Best Income Stocks In the World
Enterprise Products Partners L.P. (NYSE: EPD) is the largest publicly traded energy partnership in the United States. It owns 50,700 miles of pipelines for transporting natural gas, NGLs, crude oil, refined products (like gasoline, diesel fuel, and jet fuel), and petrochemicals.
EPD has pipelines connected to approximately 95% of the crude oil refining capacity located east of the Rocky Mountains. And it is a key or sole supplier for every ethelyne steam cracker in the country. These plants produce ethelyne from the ethane NGL They're the largest consumers of natural gas liquids in the United States. This puts Enterprise in a good position to profit from the increasing popularity of valuable NGL production.
The company owns 190 million barrels of total storage capacity for storing NGLs, refined products, and crude oil. It owns 14 billion cubic feet of natural gas storage. And it owns 25 natural gas processing facilities, and 20 facilities for processing NGLs and propylene (a petrochemical).
Enterprise doesn't only ship energy products through pipelines. it also ships them on boats. It owns 125 barges for shipping various energy products and 58 tow boats for towing the barges. Enterprise also owns import/export terminals in the Houston Ship Channel in the Gulf of Mexico. Those terminals can move a total of 21,000 barrels of NGL, crude oil, and other liquids per hour.
Enterprise Products Partners has assets are all over the United States. This company is an indispensable part of the country's energy infrastructure. Our standard of living in the United States would be a lot lower without EPD's critical energy transportation, processing, and storage assets.
Enterprise Products Partners is a little different than most MLPs. As we described earlier in this report, most MLPs are run by a general partner. The general partner earns a growing share of the distributable cash flow of the MLP.
But EPD has no general partner. So 100% of the growth in distributable cash flow goes to the limited partners. That's you, the limited partner unit holder. If we could re-design the entire MLP sector, we'd probably make every investment like this. But even with general partners, some management teams do an excellent job of creating value and growing dividends for the limited partner unit holder. Now let's see how it stacks up against our MLP criteria.
1. What are the prospects for future growth?
Excellent. As of mid-2012, EPD has $7.5 billion in new growth projects underway. It's spending $4 billion in the Eagle Ford shale in Texas to expand its pipelines and natural gas processing capacity. It's currently expanding NGL pipelines throughout the American West. And it's proposed a new 1,230 mile pipeline to transport ethane from the Marcellus/Utica shale areas to the Gulf Coast.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. EPD doesn't have much commodity price risk, and it's consistently reducing whatever little it does have. In 2012, it expects 77% of gross profits from fee-based contracts (remember... fee based contracts = no commodity exposure). It's expecting to increase that to 80% in 2013.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. Last year, it generated $3.33 billion in net cash flow from operations. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. As of fall 2012, EPD has raised its annual distribution every year for 13 years in a row and pays a 4.7% dividend yield.
5. Are distributions being made in excess of distributable cash flow from operations?
No. EPD is a big, blue-chip pipeline and processing company. It consistently generates plenty of cash flow and pursues a policy of covering its payouts with more than adequate cash generation. This makes its dividend very safe.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In 2011, it distributed 65% of its distributable cash flow from operations. This is a strong, stable dividend, with plenty of coverage.
7. Is management generating an acceptable return on any cash it retains?
Recently, no. In the eight quarters through Jun 30, 2012, net worth fell by about $0.14 for every $1 retained. We expect this to turn around soon, as management continues to invest in new growth projects.
As you can see, Enterprise Products Partners is a large, growing company. And it generates a reliable, growing stream of income for investors. At this time of EPD is well above our maximum buy price of $26 per share. Keep it on your radar. Enterprise Products Partners, L.P. is one of the most well-known MLPs. It doesn't drop into buy range often. But when it does, pounce and buy enthusiastically.
A Dominant Player in a Little-Known Corner of the Energy Industry
DCP Midstream Partners L.P. (NYSE: DPM) a primarily player in natural gas gathering and processing. Remember, natural gas processing is an essential step in transporting natural gas to customers across the country. When raw natural gas comes out of the ground, it contains impurities and heavy hydrocarbons (the NGLs we discussed earlier) that, if not removed, cause blockages in the transportation pipelines. Once separated out (through a process called "fractionation"), NGLs – butane, propane, and ethane are valuable in and of themselves.
DPM owns about 6,000 miles of natural gas and NGL pipelines. It also owns 12 natural gas processing plants, and four fractionation plants. Processing is DPM's biggest business. About 71% of its gross profit comes from natural gas processing. Another 15% is from moving and storing NGLs. And another 14% comes from wholesale propane sales.
DPM's general partner is DCP Midstream, LLC. DCP Midstream is the largest gatherer and processor of NGLs in the country. It's a huge company, with 56,000 miles of pipeline, 49 processing plants and eight fractionation facilities. DPM's association with its general partner helps give it access to new investments it might not otherwise be able to make, since it can sometimes participate in co-investments with its much larger parent and general partner.
DCP Midstream LLC is a 50/50 joint venture in Spectra Energy and Phillips 66. Spectra is a large natural gas pipeline company. Phillips 66 is a large, diversified energy company. The joint venture owns a 2% general partner interest and a 26% limited partner interest.
Between DCP Midstream, LLC, Spectra, and Phillips 66, DPM can draw on the expertise, experience and opportunities from three major players in the U.S. domestic energy market. It's like having three "rich uncles" helping you out in a business venture. We think it makes DCP Midstream L.P. a better investment than most other MLPs. Now let's see how DCP stacks up against our MLP criteria.
1. What are the prospects for future growth?
Over the next three years (2012-2015), DPM estimates it will make $3 billion worth of new growth investments with its general partner alone. Today, about 15% of DPM's gross profit comes from moving and storing NGLs. By 2015, it expects that will grow to as much as 45% as it ramps up growth in its NGL business.
As of June 2012, DPM had identified seven different pipeline and processing projects scheduled to begin generating revenues between 2012 and the end of 2014. Most are scheduled to be in operation by mid-2013. They'll all produce profits and help fund higher limited partner cash distributions in the next two to three years.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. For 2011, DPM's gross margin was 60% fee-based and 40% commodity-price-based. But most of that commodity price exposure is hedged (protected from risk). Just 12% of DPM's gross margin this year is exposed to commodity prices and unhedged. That's very minimal exposure, and should give unit holders peace of mind that the source of their cash distributions is well-protected.
By 2015, DPM expects its gross margin to be as high as 80% fee-based. Much of the remaining portion will be hedged. I doubt DPM will ever have much direct exposure to commodity prices. That should help keep a steady stream of cash distributions coming to unit holders no matter what the commodity does.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. In 2011, it generated $204.1 million of net cash flow from operations. And it generated positive net cash flow from operations in nine of the last 10 quarters. This is strong. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. DPM declared its first quarterly cash distribution in February 2006. It has raised its cash distribution every year since. Since going public in 2005, DPM has raised its cash distribution 18 out of 26 quarters. It currently yields 6%. Management projects it will increase its cash distribution by about $0.01 per quarter during 2012 and 2013.
5. Are distributions being made in excess of distributable cash flow from operations?
No. Like most MLPs, DPM might distribute more than its distributable cash flow every several quarters. But on an annual basis, DPM consistently distributes less than its distributable cash flow.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In the eight quarters through June 30, DPM distributed 84% of distributable cash flow from operations. That's a great number. It'll move up and down over time, but we expect it to remain fairly high overall. As you'll see in our answer to question No. 7, it's good that DPM retains the other 16% of its distributable cash flow rather than paying more of it out to shareholders as a dividend.
7. Is management generating an acceptable return on any cash it retains?
Yes. For every $1 it retained in the eight quarters through June 30, DPM grew unit holder equity by $8.80. That means unit holders basically made 8.8 times their money on their investment. That's what DPM has done recently with the 16% of distributable cash flow it's retained in the business. This is a phenomenal performance.
DPM won't always be able to create $8.80 of shareholder value for every $1 it retains. But it should be able to grow net worth faster than other MLPs because of the extra opportunities it'll be afforded by its general partner like the "drop-down" transactions and long-term contracts for the use of DCP Midstream, LLC's pipelines and processing facilities.
We normally don't recommend paying more than 10 times distributable cash flow from operations for MLPs. Our experience tells us that's a cheap price. Due to its massive wealth-creation ability, we're willing to recommend you pay as much as 12 times distributable cash flow from operations for DCP Midstream.
BUY DCP Midstream Partners L.P. (NYSE: DPM) up to $44.
One of the Biggest Natural Gas Processors in the Country
ONEOK Partners L.P. (NYSE: OKS) is one of the biggest publicly traded master limited partnerships in the U.S. OKS is in three businesses: natural gas gathering and processing, natural gas pipelines, and natural gas liquids (NGLs). And it's one of the biggest U.S. companies in all three businesses.
OKS owns 15,900 miles of pipelines for gathering natural gas from six producing basins in Oklahoma, Kansas, North Dakota, and Wyoming, 14 active processing plants with the capacity to process 860 million cubic feet per day of natural gas and 7,100 miles of transportation pipelines with a peak capacity of 6.5 billion cubic feet her pay. Its transportation business is mostly fee-based, and has little exposure to commodity price risk.
It also owns one of the biggest NGL systems in the country. OKS' NGL system connects natural gas liquids supply in the Mid-Continental and Rocky Mountain regions with key market centers in the Gulf Coast and around Oklahoma. OKS' NGL gathering pipeline system connects to about 100 different natural gas processing plants... 90% of which are in the Mid-Continental region (Texas, Oklahoma, Kansas). It also includes:
- 549,000 barrels per day of fractionation capacity.
- 9,000 barrels per day of isomerization capacity.
- 23.2 million barrels of NGL storage.
- 3,660 miles of NGL distribution pipeline with 774,000 barrels per day capacity.
- 3,280 miles of NGL gathering pipeline with 842,000 barrels per day capacity.
- 50% equity interest in the Overland Pass NGL pipeline system in Kansas, Wyoming and Colorado.
OKS is already the largest independent processor of natural gas in the Bakken region. It's got four existing processing plants in the area, and its planning four new ones. And it owns 50% of the Northern Border pipeline, which goes right through this area. The oil in this region also has a very high NGL content, of 8-13 gallons per thousand cubic feet of natural gas.
One of OKS' biggest new investments in the Bakken region is the $1.8 billion it's planning to spend on a 1,300-mile crude oil pipeline in the Bakken region, called the Bakken Crude Express Pipeline. Construction is scheduled to begin in late 2013/early 2014. It should be completed by early 2015. It'll extend from North Dakota, south through Wyoming to Colorado, then southeast through Kansas to Cushing, Oklahoma. More than 80% of this new pipeline will parallel OKS' existing and planned NGL pipelines.
OKS' general partner is owned by its parent company, ONEOK (NYSE: OKE). OKE is a Tulsa, Oklahoma-based natural gas utility serving Texas, Oklahoma, and Kansas. It owns a 2% general partner interest and 100% of OKS' 11.8 million outstanding Class B units. (The ones you can buy are the Class A units.) OKE's Class B units give it the right to receive a distribution on its units equal to 110% of limited partner distributions.
OKE is a shareholder-friendly company, so it has waived its right to receive 110% of the limited partnership distributions. I expect it to continue to waive this right for several more years, as the company continues to grow. Let's see how it stacks up against our MLP criteria.
1. What are the prospects for future growth?
OKS has announced roughly $5.7 billion-$6.6 billion of new growth projects through 2012. As of late August 2012, it had a backlog of more than $2 billion in unannounced growth projects.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. For 2012, OKS expects to generate only about 43% of its profit from sources of revenue exposed to commodity price risk. Much of this risk is hedged with futures contracts. This leaves 57% of revenue free from commodity price risk.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. OKS's cash flow generation is strong. In 2011, it generated $1.13 billion of net cash flow from operations. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. Since the first quarter of 2006, cash distributions have grown at an annual rate of about 8% a year. But that's accelerating... OKS expects to continue with 2.5% per quarter increases in cash distributions through the end of 2012. It expects to deliver 15%-20% annual growth in cash distributions in 2013 and 2014. As of October 2012, OKS pays out a 4.4% dividend yield.
5. Are distributions being made in excess of distributable cash flow from operations?
Overall, no. Like other MLPs on our list, every now and then you'll see a quarter or two where the distribution exceeds distributable cash flow. But most years, distributions will not exceed distributable cash flow.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. In the eight quarters ending June 30, 2012, OKS distributed 69% of distributable cash flow. That's a strong number.
7. Is Management generating an acceptable return on any cash it retains?
Yes, it's excellent. For every $1 it retained in the eight quarters ending June 30, 2012, OKS increased unit holder equity by $1.59. That means OKS is able to invest $1 and create $1.59 of unit holder value. Not many companies can do that.
OKS is an excellent investment, with a strong history of creating shareholder value, and providing a steadily increasing income stream. As of October 2012, OKS has been trading below 10 times distributable cash flow per unit – our main criteria for setting maximum buy prices. But we also like to see MLP yields of 4% or higher than the 10-year Treasury yield. We believe that helps reduce the risk of owning MLPs.
OKS is trading at a yield of about 2.65% above the 10-year Treasury yield recently. That's too low. Based on these valuations, we don't recommend opening a position in OKS until the stock drops to $57 or below.
BUY ONEOK Partners L.P. (NYSE: OKS) up to $57.
A Corner of the Energy Boom You Don't Hear Much About
Magellan Midstream Partners (NYSE: MMP) is one of the largest liquids pipeline owners in the U.S. It owns the longest refined petroleum products pipeline system in the country. Refined products include gasoline, diesel fuel, and jet fuel.
Magellan also transports crude oil. Magellan's pipelines distribute products from over 40% of the country's crude oil refining capacity. Magellan also has the capacity to store over 75 million barrels of liquids at various locations around the country. Magellan's pipelines can tap into more than 40% of U.S. refining capacity. It can store over 75 million barrels of petroleum products such as gasoline, diesel fuel, and crude oil.
Magellan's petroleum pipeline system accounts for roughly 75% of its operating profit. Its petroleum storage terminals account for roughly 23% of operating profit. It also owns an ammonia pipeline system that accounts for about 2% of operating profit. MMP's petroleum pipeline system is about 9,600 miles of pipeline that run straight up the middle of the country, from Texas to Minnesota. Connected to this system are 50 storage terminals with 39 million barrels of storage capacity.
Magellan is planning a major new pipeline from the Permian Basin to the Gulf Coast of Texas. At an expected cost of $375 million, it's the largest new growth project in MMP history. The finished, upgraded pipeline will send crude oil from the Permian Basin region to the Gulf Coast. It'll also send refined products (like gasoline and diesel fuel) from the Gulf Coast as far west as El Paso, on the westernmost tip of Texas.
MMP is also proposing to partner up with global energy giant Occidental Petroleum to build a 400-mile crude oil pipeline from Colorado City, Texas to the Texas Gulf Coast area. If the project gets approved, it's expected to be operational by mid-2014.
MMP also owns seven large storage terminals in Cushing, Oklahoma (one of the largest delivery/distribution hubs for crude oil in the world)... Corpus Christi and Galena Park on the Gulf Coast of Texas... Gibson and Marrero, Louisiana Gulf Coast... Wilmington, Delaware... and New Haven, Connecticut. These terminals have a total capacity of 36 million barrels of storage. This is a good business.
MMP also owns 27 storage terminals (totaling 5 million barrels of storage capacity), located along four pipelines owned by other companies, from the Texas Gulf Coast up the east Coast as far north as Virginia, and from Texas northward as far as the Illinois shore of Lake Michigan.
Like Enterprise Products Partners, MMP does not have a general partner. So unit holders will realize 100% of the benefits of growth in distributable cash flow. Now let's see how MMP stacks up against our MLP criteria.
1. What are the prospects for future growth?
Excellent. As of August 2012, Magellan has $700 million worth of new expansion and growth projects currently underway. Another $500 million of new expansion/growth projects are under consideration.
In the last eight years, MMP invested $2.5 billion in new growth projects and acquisitions. That's just over $300 million per year on average. So it's investing at more than double that rate today. The company is currently spending $375 million on the largest single expansion project in its history. There's plenty of growth now at MMP, and plenty more to come in the future.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. As of June 30, 2012, roughly 82% of MMP's operating profit came from fee-based, low-risk businesses with no commodity price risk.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. It's one of the most consistent net cash flow generators. It's generated positive net cash flow from operations every one of the last eight quarters. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. It not only increases annual distributions almost every year but it has increased its distribution every quarter for the last 10 quarters in a row (through the August 2012 distribution). As of October 2012, it pays a dividend yield of 4.3%.
5. Are distributions being made in excess of distributable cash flow from operations?
Like some of our MLPs, Magellan might distribute more than its distributable cash flow every several quarters. But not frequently enough to cause concern about the strength of the dividend.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Yes. MMP paid out 69% of its distributable cash flow in the eight quarters ending June 30, 2012.
7. Is management generating an acceptable return on any cash it retains?
Usually, but not always. For every $1 per share of cash retained in the eight quarters ending June 30, 2012, MMP grew net worth by $0.68. We think Magellan's massive new $375 million crude oil expansion and pipeline reversal project will put its wealth generation squarely in the black.
Overall, when you look at Magellan's history of income generation and its excellent growth prospects, it's a good A.O.P-style investment. It should provide unit holders with a growing income for many years to come.
Magellan Midstream Partners, L.P. doesn't drop into buy range often but when it does, pounce.
At the time, MMP is well above our maximum buy price of $33 per share. Keep an eye on it.
A Desired Giant in Energy Transport and Storage
We've already discussed crude oil carrier Sunoco Logistics Partners (NYSE: SXL) in our section on Energy Transfer Partners. Energy Transfer recently SXL's general partner Sunoco (NYSE: SUN). In fact, the main reason Energy Transfer bought Sunoco was to get control of SXL. Why? Well, just look at SXL's assets. SXL is in several related energy transportation and storage businesses:
- SXL owns more than 5,400 miles of crude oil pipelines in Texas, Oklahoma, and the Gulf Coast.
- It owns 2,500 miles of refined product pipelines in the Northeast, Midwest, and Gulf Coast regions.
- It buys crude oil and sells it to refineries.
- It owns several minority stakes in pipelines in these regions and the Pacific Northwest.
- It owns and operates 10 million barrels of refined product storage capacity.
- 22 million barrels of oil storage at the Nederland Terminal, Texas Gulf Coast.
- 5 million barrels of oil storage, Eagle Point Terminal, New Jersey.
- 1 million barrels of liquefied petroleum gas near Detroit.
The West Texas Gulf pipeline originates in the middle of one of the biggest oil discoveries in U.S. history: the Cline shale in the Permian Basin of west Texas. It stretches from Colorado City, Texas (near the eastern New Mexico border) to its Nederland Terminal storage and distribution facility on the Gulf Coast. (More on Nederland in a minute.)
Cline is still mostly off the world's radar screen... But we know a Texas oil tycoon with decades of experience who thinks Cline will ultimately produce a total of 35 billion barrels of oil, based on current drilling technology and oil prices. That's more than the three largest oil shales in the country (Monterey in California, Bakken in North Dakota, and Eagle Ford in Texas).
The Cline play has already attracted major oil and gas producer Devon Energy. Devon will drill 15 wells on its 500,000-acre position in 2012. We expect that to attract several more major oil companies. All of this attention will grow the Cline region's production and that's great news for SXL.
In late June 2012, SXL announced plans for a new project to transport crude from North and West Texas to the Gulf Coast. The project is called Permian Express, named for the Permian Basin. Permian Express will happen in two phases.
- Increasing pipeline capacity to add another 150,000 barrels per day of oil transportation out of the Permian region and to the Gulf Coast.
- Connect pipelines near the Cline to existing Sunoco pipelines West Texas and Louisiana. This would add yet another 200,000 barrels per day of oil transportation to the region.
Aside from the West Texas Gulf pipeline and the growth potential it represents, SXL owns another highly valuable asset on the Gulf Coast: its Nederland Terminal. It lies in the heart of the Gulf Coast refining region. Nederland is the destination for SXL's crude oil from North and West Texas. Nederland can deliver up to 2 million barrels per day to any of the following:
- ExxonMobil's 2,400-acre refinery, chemical and lube plant complex in Beaumont, Texas.
- Valero Energy's 4,000-acre 310,000 barrel per day Port Arthur, Texas refinery complex.
- France's Total SA's 174,000 barrel/day refinery.
- Shell Oil's Houston refineries.
- Two Department of Energy Strategic Petroleum Reserve facilities.
1. What are the prospects for future growth?
Now that SXL is controlled by another of our recommendations (Enterprise Products Partners), its prospects for future growth have improved. SXL is now part of a larger, more-focused entity than when it was owned by Sunoco. Given the enormous potential of the Cline shale and SXL's ownership of the Nederland Terminal on the Gulf Coast, we believe SXL's new Permian Express project is likely the beginning of a major growth effort in West Texas.
2. Is there too much commodity price risk in the MLP's revenue stream?
No. About one-third of SXL's 2011 earnings before interest, taxes, depreciation, and amortization (a standard cash flow measure used by some MLPs and companies) was exposed to commodity price risk. As with most of our MLPs, we expect this to stay about where it is or possibly even improve with time.
3. Does the MLP consistently generate positive net cash flow from operations?
Yes. SXL has generated positive net cash flow from operations in seven of the eight quarters through March 31, 2012. SXL generated a record $166 million in distributable cash flow in the second quarter of 2012. "Net cash flow from operations" is just an accountant's way of saying "cash flow." That's where your dividends come from.
4. Does the partnership have a history of increasing annual distributions?
Yes. SXL is a world champion at increasing distributions. As of August 2012, it had raised its distribution 29 quarters in a row. That's every quarter for more than seven years in a row.
5. Are distributions being made in excess of distributable cash flow from operations?
No. It distributes a little more than half of its distributable cash flow from operations.
6. Does the MLP distribute the majority of its distributable cash flow from operations?
Nearly. In the eight quarters ending June 30, 2012, SXL distributed 46% of its distributable cash flow from operations. The number fluctuates somewhat, but we expect distributions to rise now that SXL is controlled by Energy Transfer (which distributes 100% of its distributable cash flow from operations).
7. Is management generating an acceptable return on any cash it retains?
Not at the moment. For every $1 of distributable cash it retained in the eight quarters ending June 30, 2012, SXL generated $0.96 of net worth. But we expect this number to rise in the near future as new growth projects come online.
Sometimes, MLPs retain more cash to fund new growth efforts. It takes a little time for the new investments to be made and for it to produce a return. Recently, SXL has been retaining more cash than usual to fund new growth efforts. I expect these efforts will generate a good return, eventually. It takes time for pipelines to be built. For now, we're willing to look past the current situation to the future growth prospects represented by the extra retained cash even if it requires us to answer no to this question. I believe we'll be answering yes before long.
Overall, SXL exhibits the characteristics of a safe MLP investment with excellent growth prospects and stacks up well against our model.
BUY Sunoco Logistics Partners L.P. (NYSE: SXL) up to $66 per share.
Please note: If you buy Energy Transfer Partners, you'll automatically be invested in SXL, since ETP owns a controlling stake in SXL. You may not want to "double up."
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The financial results that qualify a stock for our criteria are constantly changing. We think the six companies in profiled here will continue to do what they've done in the past: consistently generate results that (almost always) meet our criteria.
It's normal for our top six MLPs to change from time to time and if one does not currently pass our criteria will get its act together or one that does pass will have a bad year and fall off the radar. Overall, we think we've developed a highly powerful tool that lets us reduce a large and growing number of possible MLP investments down to a small group. For now, keep these six MLPs on your watch list and when they are in buy range... pounce!
That's what investing is all about. It's about understanding the overall trend in place and then doing your homework until you find just the right opportunities to take advantage of that trend. I hope you'll use this information as an important point for building your own MLP portfolio. It can help you earn a large and growing income for years to come.
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INVESTOR TIP
Do the research to find out if your MLP investment offers a DRIP (dividend reinvestment plan). DRIPs can increase your dividend income exponentially with a compounded rate of return.
I wanted to stay focused on MLPs and the criteria you should use to aid in your selection. You must check out Vanguard Natural Resources, LLC (Nasdaq: VNR). VNR is a publicly traded LLC (LLCs are similar to MLPs).
VNR doesn't own stakes in other publicly traded partnerships, so it shouldn't be an additional concern for your tax professional to sort out. Even so, if you put up with any extra paperwork, you can earn high yields and defer tax payments for years. It's a personal decision. For many investors, the benefits outweigh the extra work at tax time.
BUY Vanguard Natural Resources, LLC (Nasdaq: VNR) up to $30 a share
Click Here to learn more about K-1 Partnerships. Note: This is an older document. Please do not follow the specific recommendations.
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