The recent, large declines in energy commodity prices have resulted in a significant, almost across the board sell-off in the MLP sector. While the Alerian MLP index is down 13.3% since the start of the 2014 fourth quarter, many of the small-cap MLPs that I watch are down a lot more. With service offerings that are necessary in any commodity price environment, the small-cap logistics focused MLPs offer attractive current yields and the potential for significant total return gains when distribution rates are increased.
This group of logistics MLPs are all recent IPOs, without extended track records. As a result, the market does not yet know where to price these units, which when combined with the general MLP sell-off, provides some currently attractive entry values. Be advised that these MLPs are volatile and thinly traded, so take the appropriate precautions when making an entry investment.
Arc Logistics Partners LP (ARCX) is primarily involved in the terminalling, storage, throughput and transloading of crude oil and petroleum products. Terminals and other assets are located in the East Coast, Gulf Coast, West Coast and Midwest. Arc Logistics was launched by non-public Lightfoot Capital Partners with a November 2013 IPO. Customer contracts with Arc Logistics for storage and terminalling services can be short to long term (average of 3 years). Contracts are typically fee for service with minimum throughput commitments. ARCX also owns a 10% interest in Gulf LNG Holdings, which is 50% owned and operated by Kinder Morgan Inc. (KMI). The minority interest provides a stable income stream 20-year contracts on the facility. Lightfoot Capital also holds a 10% stake which could at some point be transferred to Arc Logistics. Prior to its IPO, the partnership had a five-year record of steady growth through acquisitions. The ARCX distribution has been increased for each of its three full quarters since the IPO, with 2.5% distribution growth for Q3 2014. When the unit price was in the mid-$20's, ARCX was a 6.5% yield MLP with moderate distribution growth potential. Now at less than $17, ARCX yields 10% and still provides essential services for the energy sector.
PBF Logistics LP (PBFX) was spun off by PBF Energy (PBF) with a May 2014 IPO. PBF Energy owns and operates three oil refineries in Ohio, Delaware and New Jersey. With the IPO, two crude by rail unloading terminals, a crude oil truck uniloading terminal and a crude tank farm were transferred to PBFX. PBF Energy owns a significant amount of other logistics assets that can be transferred to the MLP over time to support the distribution growth goals. Retained asset represent at least two times the annual EBITDA as the currently owned partnership assets. PBFX has long-term, fee-based, minimum commitment contracts with its sponsor, PBF Energy. PBFX has paid just one full quarterly distribution, which was at the partnership agreement minimum. I expect 10% to 12% annual distribution growth from drop downs and efficiency improvements. When PBFX was a $30 MLP six months ago it yielded 4%. Now at $20, the yield 5.8% with no meaningful change in the growth prospects.
Delek Logistics Partners LP (DKL) launched with a November 2012 spin-off/IPO from Delek US Holdings (DK). Delek Holdings owns and operates two refineries located in Texas and Arkansas. The company also owns 365 retail convenience stores in seven states. Delek Logistics assets include 9 light product terminals, 1,150 miles of pipelines, 8.1 million barrels of storage capacity, and a wholesale and marketing business. The current logistics are about double the assets owned at the DKL IPO. Growth opportunities come from assets developed by the sponsor and dropped to the MLP, capacity improvements on existing assets and outside acquisition. Delek Logistics has been an extremely efficient investor of growth capital. For 2014, $85 million of growth capex is expected to result in $25 to $25 million of additional annual EBITDA by Q1 of 2015. DKL has steadily increased its quarterly distributions, with the latest payout 31% higher than the distribution rate set at the time of the IPO. The DLK unit price has moved up nicely over the last month but is still about 15% below the high set last August. At the current $36 unit price DKL yields 5.35% based on the Q3 distribution. I expect annual distribution growth in the mid-teens.
These smaller MLPs have been significantly more volatile than their large-cap peers. The trade off is higher yields combined with similar or better distribution growth potential. Investors, who can stand the volatility, should be well rewarded when the market figures out that low crude oil prices will have minimal effect on the results from these MLPs. Unit prices can swing by 5%+ on a daily basis, so it can pay to leg into a position, or just watch for lower unit prices.
