Master Limited Partnerships can be an attractive income investment option. Most of these MLPs offer high cash distribution yields. As a result, income hunting investors are attracted towards these businesses. Some of the highest-yielding MLPs are operating in the energy sector. Energy sector MLPs are usually the most consistent and best performing businesses. There are a lot of options in the energy sector. However, I like Energy Transfer Partners (ETP) and Enbridge Energy Partners (EEP). Both of these MLPs yield above 7% at the moment. I will elaborate in the following paragraphs why I believe these two MLPs can be good investments.
Enbridge Energy Partners
Enbridge Energy Partners owns and operates crude oil and liquid petroleum transportation and storage assets, and natural gas gathering, treating, processing, transportation and marketing assets in the United States. The partnership offers extremely attractive yield with substantial growth opportunity. At the moment, quarterly cash distribution of the partnership stands at $0.5435 per unit, yielding 7.90%. Since 2010, the partnership has been raising cash distributions in the third quarter, and there is a possibility that distributions will be raised again.
However, last year earnings were not impressive for the partnership, mainly due to weak natural gas and NGL (Natural Gas Liquids) prices. While natural gas prices are expected to remain weak in the short-term, Enbridge's crude oil segment is extremely strong.
The partnership recently completed the Bakken expansion project, and it is in service. The project has expanded an existing pipeline, running from Berthold to Steelman, and constructed a new 16-inch pipeline from a new terminal near Steelman to the Enbridge Pipelines Inc. mainline terminal near Cromer, Manitoba. The pipeline now provides 145,000 barrels per day of capacity, of which, 25,000 barrels per day was put on service during the first quarter of this year. After the completion of this project, the production from Bakken area will now be accessible to a number of markets.
There are firm commitments in place from anchor shippers for 100,000 barrels per day of capacity. The expansion project was underwritten by take or pay contracts. Expansion of the Bakken operations will certainly add to the cash flows of the partnership, and allow it to increase distribution in the future. The prospect of growth in cash distributions will have a positive impact on the price of the units. As a result, I believe Enbridge Energy Partners will be an attractive investment. It provides the opportunity to collect healthy cash distributions along with a potential for capital gains.
Energy Transfer Partners
Energy Transfer Partners owns and operates one of the largest and most diversified portfolios of energy assets in the country. ETP at present has natural gas operations that include approximately 24,000 miles of gathering and transportation pipelines, treating and processing assets, and storage facilities. At the moment, quarterly cash distribution of the partnership stands at $0.89375 per unit, yielding 7.50%. The partnership has not increased quarterly distribution since 2008, and I do not believe there will be an increase in distributions in the short-term. However, ETP still offers an extremely attractive yield.
ETP's heavy exposure to natural gas is the reason for a lack of increase in cash distributions. Natural gas prices are not expected to recover substantially in the short-term. As a result, I believe the cash flows of the company will remain under pressure. Over the past three years, ETP cash flows have been fluctuating, and currently stand below 2010 levels. At the end of 2010, the partnership reported cash flows from operations of $1,202 million, which came down to $1,198 million by the end of 2012. Furthermore, the partnership lacks fee-based contracts to provide stable cash flows.
On the positive side, the partnership recently reported one of the best quarterly earnings in quite some time. The partnership reported adjusted EBITDA of $948 million for the fourth-quarter, $455 million more than the same quarter last year. Furthermore, distributable cash flows also increased by $169 million, and stood at $488 million for the fourth quarter.
I believe the company generates enough cash flows to maintain its current cash distributions. However, investors will have to be patient for an increase in cash distributions. Lack of an increase in cash distributions will likely impact the unit price in the short term. However, those investors who are willing to hold long term might enjoy substantial gains. Natural gas prices will recover as the oversupply dissipates due to the prospects of export of natural gas.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.