We’ve been big fans of MLPs for years because of two simple reasons. They pay handsome yields that, as a group, tend to grow over time (which is crucial) and the energy market is only becoming more supply constrained (shale gas notwithstanding). With that we point to you a great article about energy MLPs and specifically which ones are worth buying now.
“The energy master-limited partnership universe consists of about 80 companies with collective market capitalization of $300 billion—60% of which is headquartered within 20 miles of Greg Reid’s Houston office. Reid is a managing director of Salient Partners and head of its $1 billion MLP business. Prior to joining Salient he founded and ran RDG Capital, a wealth management firm that also specialized in energy MLPs.
Reid is bullish on the companies—which are structured as limited partnerships, trade on public exchanges and earn 90% of their returns from natural resources—estimating their total annual returns in the double-digits.”
What do you look at when evaluating an MLP?
We evaluate all 80 of the energy MLPs—I say energy because there are some that are not energy; StoneMor is a cemetery MLP. We don’t look at the maybe 20 or so MLPs that don’t fit the energy infrastructure. But of the 80 that qualify, we’re looking for a long-term, sustainable business plan that generates attractive current income, meaning yields of 5% to 8% a year and a long-term growth rate. MLPs are really driven by a total-return formula that is essentially yield plus growth, and today current yields in the index are around 6.2% and growth is around 6.5% or so, even 7%, on a market-cap-weighted basis. That leads us to expected returns of around 12% to 13% a year.
And what are some of your best ideas?
One of our favorite companies is Plains All American Pipeline. It yields about 5% today and we expect growth to be in the 5% to 8% a year range. They’re involved in the crude oil transportation, storage and logistics business, which is a high-growth, very profitable part of the MLP industry right now. They also just announced a two-for-one stock split and that’s a good sign that they expect future growth in their cash-flow. And they’re, of course, outperforming this year and have been for a number of years. So that’s one of our top holdings. It’s based here in Houston; it would be a core position and all of our funds would own Plains.
Another large-cap name—these are both pretty recognizable names—Enterprise Products, which is another large Houston company, is the largest company in the industry. It’s a similar story as Plains: A diversified business, it’s really the industry leader and has a yield of approximately 5% and we’re expecting at least 6% annual growth. Enterprise is primarily involved in the natural gas liquid fractionation business, with a number of fractionation facilities here in the Houston area, but they have also other business units that they’re involved with.
In the small- to mid-cap area, one of our favorite ideas is midstream natural gas company Targa. It’s also a Houston company and they actually have two share classes, the limited partnership yields about 6.4% today and trades for about $40 a share, and we’re expecting to see distribution growth of 10% to 15% this year and probably again next year.