Energy master limited partnerships (MLPs) have taken a beating over the past year or so -- and for good reason. Soft energy prices have driven many MLPs to make significant cuts in their dividends. Even those that haven't cut their dividends have had a tough time raising them. And that's bad for business.
The Alerian MLP Index (NYSE: AMZ) tracks the performance of 50 energy MLPs. The index hit a 52-week intraday low of $244.44 on November 15, as well as a 52-week closing low of $257.08 about a week later.
This downward trend is confirmed by the Alerian MLP ETF (NYSE: AMLP), which is an MLP-focused ETF with a market capitalization of $9.7 billion under management. This index currently sits just pennies above its all-time low of $10.11. The fund currently yields 6.1% annually.
Despite these numbers, long-term dividend-focused investors looking to stake out a position in solid, income-generating MLPs would be wise to consider buying now despite the potential for gut-churning volatility.
MLP distributions are rising. Now, it's important to remember that MLPs are pass-through entities where the company's profits are distributed directly to the MLPs' partners. As with any pass-through entity, rising distributions correlate strongly to better cash flows and a healthier long-term outlook.
Of course, not all MLPs are created equal. Your best move here is to stay with midstream MLPs that make their money by processing, storing, and moving oil and gas products for end-users. These companies are safer bets than both upstream and downstream players, and still have some relatively fat yields to boost.
Here are three of my favorites based on important metrics like positive year-over-year distribution growth, price-to-discount cash flow (P/DCF), and distribution yield.
The first is Andeavor Logistics (NYSE: ANDX).
Andeavor Logistics is a full-service logistics company operating primarily in the western and mid-western regions of the United States. The company owns and operates a network of crude oil, refined product, and natural gas pipelines.
According to the company's recent investor presentation, the company plans to grow its EBITDA by $1.4 billion to $4.5 billion by 2020. That's a 45% increase in just over two years. And get this: They plan to accomplish this with just a 4% increase in annual capital spending.
Now that's impressive.
But let's just look at ANDX from an investment perspective using some of my favored metrics. ANDX grew its distributions by 12.59% over the past year. And this isn't a one-off -- ANDX has grown its distributions each year for the past six years.
Shares are trading at a P/DCF of just 7.9 -- making the stock attractive from a value perspective. Lastly, ANDX currently yields 8.7%. For investors looking for a safe, high-yielding investment, Andeavor fits the bill.
But it's far from the only MLP with solid fundamentals. Shares of Western Gas Partners (NYSE: WES) are attractively priced, despite declining more than 25% in 2017.
And despite the decline, the partnership still managed to grow its distributions by more than 7% this year. And at its current price, shares trade at a P/DCF of just over 8% -- making shares quite attractive. On top of this, the partnership yields 7.7%.
And talk about consistent. WES is the only midstream MLP that went through the financial crisis without a distribution cut. And that speaks volumes about its stability and management skill.
The last midstream MLP is Tallgrass Energy Partners (NYSE: TEP).
As you can see from the chart above, TEP has seen the smallest decline YTD, falling just 3.4% since January. Of course, this ignores the decline from the high of $53.76 in February -- a fall of nearly 17%. But like the other two MLPs, TEP has been punished too severely for the volatility in oil prices.
You see, TEP has the best metrics of the three. TEP grew its distributions at a remarkable 18.9% over the past year. TEP's most recent quarter marks its 17th consecutive quarterly distribution increase.
Shares of TEP trade at a P/DCF of a minuscule 3.75, making it the most attractively priced MLP of the bunch. This is backed-up with a forward price to earnings (P/E) ratio of 10.8. And on top of these valuations, the MLP yields an impressive 8.5%.
The Bottom Line
Midstream MLPs have seen their share prices take a hit. And while the decline is understandable to some extent, the degree to which MLPs have been punished by the market doesn't make sense. This is especially true with MLPs resolute in increasing their distributions despite the volatility in oil prices.
Given the share price declines, income investors should take advantage of this overly punished sector and lock in some very attractive yields on companies committed to growing their earnings and distributions.
Risks To Consider: While some consolidation in the price of oil has certainly helped shore up the energy sector, there is no guarantee that oil prices will be able to hold their current levels. This is especially true given the huge impact that fracking has on the industry. Caution is warranted.
Action To Take: Dollar-cost average into each of the three MLPs up to a maximum of 3% of your portfolio over a period of 2 to 3 months. Use a trailing stop of 25% to protect your principal. Expect some volatility in the price of oil, as the commodity is likely range-bound for at least another 12 months.
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