Generally speaking, the interests of an MLP's General Partner (GP) are aligned with that of the MLP it manages, since the GP's share of distributions rely on the success of the MLP and its DCF. However, the GP's top priority may not always be its unit holders. This is because some GPs are paid Incentive Distributions, or IDRs, on a sliding scale.
In plain English, this means that as the MLP's cash flow grows, the GP can leech a bigger percentage of distributions. This reduces what unit holders could be receiving if the original percentage stayed constant. The righteousness of this situation is debatable, since the general partner manages and controls the MLP's operations and expansions, and should be rewarded for growing the business. However, some argue that some GPs can be too greedy and sometimes leech too much of the MLP's distributions. For this reason, GPs not owned by the MLP are often viewed as a negative attribute by investors. Some of the largest and most successful MLPs don't have IDRs owed to GPs, or simply buy the GP to harness/control all the distributions and to maximize growth potential. Popular stocks like Enterprise Product Partners (EPD) and Markwest Energy Partners (MWE) quickly come to mind when I think of MLPs unrestricted by IDRs. But are there other MLPs without leeching IDRs that are little known to the investment community?
Copano Energy LLC (CPNO), Eagle Rock Energy Partners (EROC), Genesis Energy (GEL) and Boardwalk Pipeline (BWP) seem like prospects due to their unloved status while being free of IDRs to a GP. Let's take a look at the basic metrics of these MLPs, with a special emphasis on distribution growth over the past five years:
|MLP||IDR's to GP?||Market Cap||Distribution||Compound Quarterly Distribution Growth Rate Since Fall 2007|
The most impressive yielder, EROC, boasts nearly a 10% distribution. However, after examining the security of EROC's distribution by considering its CQGR, it was the weakest of the four. By this important metric, which measures the reliability of distribution growth, GEL and CPNO were the most consistent distribution increasers since 2007, implying they are safer investments going forward. BWP seemed reasonable, but slightly lacked the performance of GEL and CPNO.
- Growing its presence in the Eagle Ford Shale with $1 B investments by year-end 2013. 75% of adjusted EBITDA for the 3rd Q of 2012 was derived from Texas, which includes both North Barnett and the Eagle Ford Shale.
- For the 3rd Q 2012, CPNO's Oklahoma assets, which includes the Mississippian Lime, accounted for 16% of adjusted EBITDA.
- Volume growth in this region is expected to increase as drilling activity increases in this relatively young deposit.
- Shifting towards a fee-based revenue stream due to strong presence in Eagle Ford Shale and Barnett Shale. Net commodity exposed contracts were reduced from 73% in 2010 to 36% in Q3 2012.
- Most recent reported Distribution Coverage Ratio of 1.2x, implying the distribution is safely secured by free cash flow for now.
- On January 3, 2012, GEL completed the acquisition of most of Marathon Oil Company's (MRO) Gulf of Mexico pipeline assets for $205.9 M. Acquired interests include: Poseidon Pipeline (28%), Odyssey Pipeline (29%), Eugene Island Pipeline System (23%) and two associated laterals linked to the Eugene Island Pipeline System (100%). (click to enlarge)
- This system holds ample exposure to future revenue streams in this region in the Gulf, providing a growth opportunity. For the first half of 2012, this system created a distribution of $14.8 million. When annualized, it indicates 6.95x multiple, implying this acquisition was very intelligent and holds promise if more projects are developed in this region.
- GEL also has exposure to the Niobrara Shale and Powder River Basins in Wyoming, as well as the Eagle Ford Shale in Texas.
Due to relatively solid distribution growth over the past five years, strong projects in development in or near key deposits, CPNO and GEL are worthy of additional research and considerations by MLP investors. These companies are not popular in the market, and you probably won't hear their names tossed around on CNBC. In my view, this is reason to further investigate these companies, as they could be under-appreciated and therefore, undervalued at current prices. In addition, the most appealing attribute is they have no GP entity to pay IDRs too. This freedom will allow unit holders to reap the full reward of any success that may be achieved going forward, and the companies could utilize this untouched FCF to invest in additional growth projects
Disclosure: I am long EPD.