Protected Principal Retirement Strategy: MLP Field Narrowing

by: Akaralph

As the country seemingly moves toward the "fiscal cliff" I have been spending more time narrowing the field for portfolio re-allocation.

With all the talk about how the dividend (distribution) paying stocks will be affected, I am narrowing my portfolio choices to the midstream and downstream master limited partnerships [MLPs] that have a high likelihood of maintaining or increasing distributions should the markets experience a significant drop in 2013.

That said, I personally do not think that taxes on dividends will go to 40 percent - a more reasonable level would be 20 percent - but that is just my opinion.

So, let's take a brief look at the narrowed field.

Crestwood Midstream Partners (NYSE:CMLP)

CMLP is a gathering/processing [MLP] focusing on natural gas [NG] and natural gas liquids [NGLs]. As mentioned in the previous article (here), their distributable cash flow (DCF) coverage in the latest quarter was 1.0X, the compound annual growth rate (CAGR) was 16.6 percent, and the current distribution is $2.04 annually.

Historically, CMLP's distribution has consistently increased from $.168/quarter in 2007 to the present level of $.51/quarter. During the down market of 2008-2009, the distribution was actually increased three times.

Targa Resources Partners (NYSE:NGLS)

Targa is a midstream play on NG and NGL pipelines. Current DCF coverage is also 1.0X, with a favorable outlook for a ratio increase in 2013. NGLS' CAGR is 8.8 percent and the annual distribution stands at $2.65.

The historic NGLS distribution has grown from $.338 in 2007 to the current level of $.663. Distribution levels remained consistent through the 2008-2009 bear market.

Global Partners (NYSE:GLP)

Global is more of a specialty downstream MLP, involved in wholesaling, gasoline distribution and gas station operations. Its current DCF coverage ratio is 2.3X. The CAGR is quite high at 42.7 percent (if one can count on Yahoo's data), and the annual distribution is $2.13.

Historically, GLP's distribution has increased from $.48/quarter in 2007 to its current level of $.533. It remained consistent through the 2008-2009 bear market.

Calumet Specialty Products Partners (NASDAQ:CLMT)

Calumet is a refiner and marketer of hydrocarbon products. It remains one of my favorites in the [MLP] asset class. Current DCF coverage is 2.3X, CAGR is 11.3 percent and the annual distribution is $2.48.

Distribution growth since Spring 2008 has been fairly spectacular, going from $.45/quarter to the current level of $.62. After a drop in distribution in January 2008, growth has been consistent.

Crosstex Energy (XTEX)

The previous article also included Crosstex Energy as a candidate. While XTEX looks attractive with a 1.13X coverage and an annual distribution of $1.32, its distribution record in the 2008-2009 bear market was less than impressive.

From mid-2008 through early 2009 the distribution plunged from $.63/quarter to $.25/quarter. It has since grown to the current level of $.33/quarter.

New Candidate?

My research over the past few days has included NGL Energy Partners (NYSE:NGL). NGL is also a refiner and marketer (like CLMT), but also has a midstream component involving propane.

NGL's current coverage ratio stands at 1.4X, CAGR is 25.9 percent, and the current annual distribution is $1.80.

During the short time that it has been publicly traded, NGL's distribution has grown from $.167 in August 2011, to $.90 in the most recent quarter.

As the distribution will to a large degree be dependent on refining crack spreads and propane prices, NGL will require a longer look before making any buy side commitment.

If any readers have information/input on NGL I would certainly appreciate hearing about it.

Target Buy Prices

I have set some preliminary buy prices for my most favored candidates. Despite setting prices, I am still going to see how "fiscal cliff" issues fall out in January before making any purchases. Right now, a resolution of these issues is not looking too good - but what else can we expect from Washington?

Here are the levels at which I would like to buy the five stocks discussed above (have no target for NGL, if I were to decide to purchase it at all).

  • CMLP - $20 or lower
  • NGLS - $33 or lower
  • GLP - $22 or lower (has made a nice run the past few days)
  • CLMT - $27 or lower
  • XTEX - $12.50 or lower

Please don't ask how I arrived at these price levels; most are pretty arbitrary, others are based upon a desired yield level.

Disclosure: I am long CLMT, CMLP, GLP. 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.

Additional disclosure: This article does not constitute a buy or sell recommendation for any of the stocks mentioned.

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