MLP Stocks With IDRs Aligned To Benefit Investors With Growing Dividends

|
 |  Includes: CAPL, CCLP, EQM, HCLP, MPLX, NSLPQ, RRMS, SMLP, SUN, SXCP
by: MLPData

This is the first article coming from MLPData to investors here on Seeking Alpha. To kick off our contributions to the SA knowledge base, I want to cover a topic that will help investors dig out MLP investments with the potential for faster than average distribution increases. To a great extent, the investment returns from master limited partnership units will be driven by the amounts and growth rates of the regular distribution payments.

Master limited partnerships are not corporations, so investors in a MLP own units and not shares. Income payments made to investors are distributions and not corporate dividends. However, to keep things moving along and not become repetitive, the words shares and dividends may be used in this article with an understanding that the use is not technically correct.

A Quick Refresher on the MLP and IDR Acronyms

A Master Limited Partnership is a publicly traded partnership. Investors who own units are limited partners in the company. Limited partners have little or no say in how the business is run and the only benefit of partner ownership will be the proportional financial results. The owner of the general partner interest controls the direction and management of the partnership. The general partner interest typically equals a 2% interest in the partnership. With the 98%/2% split of ownership, the limited partners will receive 98% of regular cash distributions and the GP is entitled to 2%.

Incentive distribution rights (IDRs) give the general partner the right to receive more money when the distribution rate to limited partners is increased above certain levels. The structure of IDRs provides an incentive to the general partner to increase the dividend payouts to limited partner unit owners. The IDR schedule is tiered, so that as the distribution rate goes up, the percentage of distributed cash that goes to the GP also increases. For example, here is the IDR schedule for EQT Midstream Partners LP (NYSE:EQM).

Click to enlarge images.

Click to enlarge

Be aware that the IDR percentage only applies to the specific range of distribution rate. In the example on the chart, EQT Corporation receives a 50% split only on the cash required to the pay the portion of the quarterly dividend above the $0.525 level.

A Motivated General Partner Can Be Good for the Limited Partners

You can see from the IDR schedule that if a general partner can increase the dividend rate for LP units above the distribution tier levels, the amount of cash being paid to the GP will increase rapidly. This fact provides opportunity to screen MLPs for those with distributions in the low split tiers, where the GP will be more inclined to strive to increase the quarterly payout rates to get into the higher tier "splits."

I used the screening an analysis tools available on the MLPData.com website to find MLP companies that pay IDRs, are currently paying them at either the zero or 15% lowest two split levels, have increased the quarterly dividend amount within the last year, and have distributable cash flow to distribution coverage of greater than 1.0. The result was these 10 companies:

  • Compressco Partners LP (GSJK) MLP sector: Oil and gas upstream. Current yield: 8.07%. Market cap: $334 million.
  • EQT Midstream Partners LP Natural gas midstream. Current yield: 2.88%. Market cap: $2.93 billion.
  • Susser Petroleum Partners LP (SUSP) Specialty oil products. Current yield: 5.45%. Market cap: $743 million.
  • New Source Energy Partners LP (NSLP) Oil and gas upstream: Current yield: 9.61%. Market cap: S269 million.
  • Summit Midstream Partners LP (NYSE:SMLP) Natural gas midstream. Current yield: 4.97%. Market cap: $1.97 billion.
  • Lehigh Gas Partners LP (LGP) Oil and gas downstream. Current yield: 7.0%. Market cap: $433 million.
  • SunCoke Energy Partners LP (NYSE:SXCP) Coke production. Current yield: 6.40%. Market cap: $847 million.
  • Rose Rock Midstream LP (NYSE:RRMS) Oil midstream. Current yield: 4.88%, Market cap: $970 million.
  • MPLX LP (NYSE:MPLX) Oil and gas midstream. Current yield: 2.88%. Market cap: $3.15 billion.
  • Hi-Crush Partners LP (NYSE:HCLP) Oil and gas other. Current yield: 5.81%. Market cap: $1.16 billion.

As you can see this list covers the gamut of energy sectors, company size and yields. In general, an MLP paying IDRs in the low splits will be a fairly new company and some extra research is recommended before committing to an investment. However, with these companies you already know that the general partner has a significant incentive to manage operations and cash flow to produce a growing dividend for LP unit investors.

The MLPs listed above have the potential to produce above average distribution growth compared to older and larger MLP companies in the same sub-sectors of the overall energy sector. Until the distribution rates hit the high splits level, this group of MLPs offer the attractive combination of higher yields and almost locked-in quarterly or annual dividend increases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.