The Mark of a Superior MLP

The Mark of a Superior MLP

Energy master limited partnerships come in all shapes and sizes, across all stages of the value chain.

Once you feel comfortable with the MLP structure, the real decisions must be made.

“Which MLP should I buy?”

It is important to evaluate prospective MLP investments based on their specific business model.

Exploration & ProductionNatural gas transportation

Marine transportationPetroleum transportation

Refining

Petroleum Transportation

Let’s look at Petroleum Transportation MLPs.

MLPs in this sub-sector transport and/or store oil and refined products.

Petroleum Transportation

Petroleum transportation MLPs make up 35.2% of the Alerian Index,

which is outperforming the S&P 500 year-to-date.

Petroleum transportation

Oil, Oil, EverywhereBusiness is booming as oil producers drive U.S. oil production to levels not seen since the 1980s

Petroleum TransportationThere are 22 petroleum MLPs to choose from right now. Like any investment category, there are studs and duds.

A fiscally fit petroleum MLP will have three things:

Photo credit: Michael Parry

Credit Rating

1. Investment grade credit ratingLove ‘em or hate ‘em, a blessing from the credit rating agencies will lower your MLPs cost of capital, giving it an advantage over its peers.

Investment grade credit rating =

BBB- or higher (Standard & Poor’s)Baa3 or higher (Moody’s)

Credit Rating Duds

Genesis Energy (NYSE: GEL)

S&P Rating: BB-

Oiltanking Partners (NYSE: OILT)

S&P Rating: Not Rated (These things take time)

Credit Rating Studs

Magellan Midstream Partners (NYSE: MMP)

S&P Rating: BBB+(Highest possible rating for an MLP)

Plains All American Pipeline (NYSE: PAA)

S&P Rating: BBB

Distribution Coverage

2. Distribution coverage ratio > 1.0 times

You could be in for a rude awakening if your petroleum MLP can’t cover its distribution. Most of these businesses generate revenue from fee-based contracts, so if management can’t make things work with that reliable income, they better have a good reason why.

Distribution Duds

Enbridge Energy Partners (NYSE: EEP)

TTM Coverage Ratio: 0.73x

Buckeye Partners (NYSE: BPL)

TTM Coverage Ratio: 0.97x

Distribution Studs

Oiltanking Partners (NYSE: OILT)

TTM Coverage Ratio: 1.86x

Sunoco Logistics Partners (NYSE: SXL)

TTM Coverage Ratio: 1.74x

Safe Debt Levels

3. Debt-to-Adjusted EBITDA < 4.0 times

MLPs will have higher debt levels than regular C-corporations, but they still need to be reasonable. The credit ratings agencies like to see debt levels around 4.0 times EBITDA, and absolutely no higher than 4.5 times EBITDA. Any higher, and it will affect your credit rating.

Debt DudEnbridge Energy Partners (NYSE: EEP)

~4.3x Debt to EBITDA

Trying, but not there yet.

Credit: EEP investor presentation

Debt Stud

Magellan Midstream Partners (NYSE: MMP)Debt-to-Adjusted EBITDA Ratio: ~2.5x

Credit: MMP investor relations

Key takeawaysMany investors will get drawn in by an MLP’s yield, but remember, only the best of the best will have:

• Solid credit rating• Distribution coverage• Sound debt levels

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