Earnings season for master limited partnerships is in full swing, and the numbers I've seen so far have been supportive of long-term growth.
Here are three names that I'm bullish on, and one that I think may have become overvalued.
Eagle Rock Energy Partners LP (NSDQ: EROC) is hurting from lower oil and natural gas liquids prices, which have hit the commodity price-sensitive end of its business. Third-quarter distributable cash flow slipped 14.6 percent from year-earlier levels, pushing the coverage ratio down to just 0.83-to-1, a payout ratio of 120.5 percent.
On the plus side, this shortfall should narrow considerably as cash flow starts from the Oct. 1, 2012, acquisition of midstream assets in the Texas Panhandle from BP Plc (NYSE: BP). That deal included a 20-year, fixed-fee gas gathering and processing contract with BP.
Eagle Rock also announced an extension of a contract with Anadarko Petroleum Corp (NYSE: APC) in western Louisiana during the quarter.
These deals have only added to costs thus far, so the impact going forward of owning them should become considerably more positive.
Based on its decision not to raise the payout in the current quarter, management is likely to hold the payout steady until these and other expansion projects pay off enough to fund the current rate. That's currently projected for mid-2013, based on a management forecast for 5 percent to 7 percent distributable cash flow growth the next 12 to 18 months.
At least some of the timing will depend on what happens to the prices of various NGLs, for which management noted some hopeful signs during its third-quarter conference call.
In the meantime, however, Eagle Rock appears committed to maintaining the current rate, even as it builds out a wealth of new projects to capitalize on liquids production from US shale.
Eagle Rock has been disappointing this past year, but with business growth still on track, it's still a great stock.
Linn Energy LLC (NSDQ: LINE) is once again covering distributions with cash flow, as it produced a superior 1.4-to-1 coverage ratio in the third quarter, or a payout ratio of 74.1 percent.
The key was the success of a raft of recent acquisitions and expansions of production, which lifted average daily output by more than double from year earlier levels. Cash flow rose 65 percent. Linn Energy also completed a successful public offering of certain of its production as Linn Co LLC (NSDQ: LNCO).
Unitholders did not receive units of the new company but will still benefit from improved cash flows to the parent and growth funded by the funds received from the offering.
The latter is expected to help drive further growth, even as 100 percent of expected gas production is hedged through 2017 and 100 percent of oil output is protected through the end of 2016.
Following the pattern of prior dividend increases, we can expect another boost in late January. That will likely earn the units another boost in my buy target.
Spectra Energy Partners LP (NYSE: SEP) declared a quarterly cash distribution of $0.485 per unit, an increase of $0.005 over the previous level of $0.48 per unit. It's the 19th consecutive quarter that Spectra Energy Partners has increased its quarterly cash distribution.
The MLP reported adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) of $37 million versus $32.9 million a year ago. The increase was primarily due to an increase in rates on existing Big Sandy contracts, lower Gas & Transportation Segment operating expenses and higher than forecast Gulfstream equity earnings.
Third-quarter distributable cash flow per unit was $0.51, down from $0.66 a year ago but up from $0.48 sequentially and good enough for a distribution coverage ratio of 1.03.
On Oct. 23, 2012, Spectra Energy Partners announced the acquisition of a 38.8 percent interest in the Maritimes & Northeast Pipeline from parent Spectra Energy Corp (NY: SE) for $545 million.
The drop-down is consistent with the MLP's growth strategy, which is to grow via third-party acquisitions, organic projects and, if the first two aren't available, drop-downs. Management reiterated its 2012 distributable cash guidance of $222 million.
With a high-quality cash flow stream and solid growth potential Spectra Energy Partners is another great MLP to buy and hold forever.
One stock that I am less bullish on is Sunoco Logistics Partners LP (NYSE: SXL), which has returned better than 30 percent thus far in 2012.
Unfortunately, over the past year or so except for brief stretches my view has been that units of the owner and operator of refined crude oil pipelines and terminals have been well overvalued.
And up to now the MLP has been able to live up to the lofty expectations in its unit price, parlaying consistent asset growth into distribution growth.
The 9.9 percent boost in the Aug. 14, 2012, payment from the May 15 disbursement was the most explosive increase in many months. And with Sunoco Logistics' yield now just 3.8 percent, it appears investors are expecting even more ahead.
That may well prove to be the case. The MLP's general partner is now Energy Transfer Partners LP (NYSE: ETP), and the latter plans to devote substantially all of its discretionary capital budget to expanding energy liquids midstream assets, which are Sunoco Logistics' specialty.
On the other hand, if those sky-high expectations are disappointed in the least it doesn't take too much imagination to see Sunoco Logistics' unit price slide back toward $40. I explain the details of MLP investing and offer up several more picks in my report, Best MLP Investments to Own Now.