By Serkan Unal
"MLPs have been perennial favorites of individual investors, thanks to their unique tax structure and high income," writes Barron's magazine in its newest cover story about the outlook for MLPs this year. These investment instruments avoid the double taxation by passing on the partnership income to investors. In fact, they distribute nearly all their cash flow to investors, providing for high yields that currently average 5.5% for MLPs as a group, according to Barron's. Moreover, despite their complex tax reporting requirements, MLPs are tax advantaged as their distributions are about 80% tax-deferred, mainly due to asset depreciation allowances.
According to experts interviewed by Barron's, MLPs will see their cash distributions increase this year by more than 7%, with total returns reaching up to 15% for the year. This is more than the annualized total return of 13.5% achieved over the past decade. Yet, some MLPs will outperform their peers, and investors are particularly bullish about a certain few. A review of money flows of smart-money institutional investors reveals four MLPs with particularly bullish trends. Below is a closer look at the four MLPs in demand.
Access Midstream Partners LP (ACMP) is "a growth-oriented midstream natural gas services provider." It operates natural gas pipeline infrastructure in the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara and Utica shales, and is the largest gathering and processing MLP. ACMP has seen tremendous growth over the past several years. Last year, its adjusted EBITDA grew 36.7% to $477.9 million. Due to strong earnings accretion from the recent acquisition and organic growth, the MLP expects adjusted EBITDA to rise by as much as 78% in 2013 and another 29% in 2014 (see page 28 of the company's presentation). A robust expansion in adjusted EBITDA will fuel growth in distributable cash flow, thereby resulting in distribution increases of about 15% annually this year and next. This MLP recently boosted its quarterly distribution by 15.4% year-over-year. ACMP is attractive because its assets generate fixed fee revenues from long-term contracts, without direct commodity-price exposure. ACMP's assets thus assure cash flow stability. The MLP is currently yielding 4.9%, based on distribution coverage of 1.27x for 2012. The MLP is valued at 16x trailing distributable cash flow. Its institutional transactions over the past three months grew 52.2%. Last quarter, fund manager Dmitry Balyasny initiated a near $25 million position in this MLP.
Genesis Energy LP (GEL) is another midstream energy infrastructure company, operating pipelines, storage tanks and terminals, and providing refinery services. Barron's aforementioned article calls it "one of the few pure-play MLPs in crude oil logistics." In 2012, the MLP saw its adjusted EBITDA grow 30% over the prior year, to $223.8 million. Its distributable cash flow increased to a new record of $179.2 million last year, also nearly 30% above the year-earlier level. GEL has increased distributions for 30 consecutive quarters, 25 of which saw payout increases of 10% or more over the prior-year quarter. According to the noted Barron's article, growth will help drive this MLP's distributions higher by "10% each year over the next three years." The company expressed its commitment to "low double-digit growth in distributions" in the latest earnings report. The MLP's coverage ratio for full-year 2012 distribution was 1.22x. GEL is currently yielding 4.4%, and is trading at 20.2x its distributable cash flow. Its institutional transactions over the past three months increased 33%. Last quarter, Dmitry Balyasny also initiated a new $16.5-million position in GEL. Also bullish about GEL was Richard Driehaus (Driehaus Capital-see its top picks).
Northern Tier Energy LP (NTI) is an "independent downstream energy company with refining, retail, and pipeline operations." It was previously part of downstream assets of Marathon Oil Corporation (MRO). This downstream MLP pays variable-rate distributions that depend greatly on refining margins, and hence on the "crack spread," which represents the difference between refined product prices and the cost of crude oil. What may serve as a driver of higher margins is the ample supply of inexpensive heavy Canadian and light North Dakota crude oil. The MLP's adjusted EBITDA for the trailing twelve months through September 30, 2012, of $643.8 million was 49.5% higher than in 2011 as a whole. The company has paid two distributions since its IPO in mid-2012. On February 11, NTI reduced its variable-rate quarterly distribution to $1.27 per unit from $1.48 per unit. However, it still yields a whopping 17.8%. Distributions for each quarter equal the amount of the distributable cash flow in the quarter. It should be noted that swings in distributions are expected due to variations in refining margins. As regards its valuation, NTI is valued at 3.9x trailing-twelve-month adjusted EBITDA (EV/EBITDA). NTI's institutional transactions over the past three months were up 23%. NTI still has to attract hedge fund interest.
Tesoro Logistics LP (TLLP), is a "fee-based, growth-oriented (MLP) formed by Tesoro Corporation (TSO) in 2011 to own, operate, develop and acquire crude oil and refined products logistics assets." TLLP is also an MLP top-listed by experts interviewed in the aforementioned Barron's article. It is a play on crude oil logistics sector. The MLP reported total EBITDA for 2012 of $76.7 million, excluding predecessor results-an 83% increase from the year earlier. Excluding the pending acquisition of Northwest Products System, TLLP expects to generate EBITDA of about $140 million in 2013. Distributable cash flow in 2012 was $67 million, a 72% jump from the prior year. The MLP's current quarterly distribution is 30% higher than in the same quarter of the previous year. According to the noted Barron's article, "with asset additions, (the MLP is) likely to produce 12%-to-15% (distribution) growth" over the next few years. TLLP targets "prudent distribution coverage of 1.1x." Based on the last year's distributable cash flow (DCF), this MLP is trading at 25.8x. Wells Fargo sees TLLP's price-to-DCF at 16x its own DCF estimate for 2013. This MLP's institutional transactions over the past three months were up 25.4%. Last quarter, TLLP was also popular with fund manager Richard Driehaus.