A Diversified Set Of MLPs For Attractive Yield

Includes: LNGG, RNF, SXL
by: Efsinvestment

By Ahmed Ishtiaq

Master Limited Partnerships are a great way of collecting cash for income investors. Normally, MLPs have high yields due to high cash distributions. My fellow Seeking Alpha authors have talked in detail about the tax benefits and structures of MLPs. As a result, I will move directly to the picks I have made for this piece. Investors tend to put almost all the MLPs in the same basket; however, MLPs can also be categorized into different groups. Some of the sub-groups include natural gas pipelines and storage, oil pipelines and storage, oil and gas production companies and fertilizer companies. Of course, these sub-groups do not cover all the categories; however, they do represent the majority of MLPs' sectors.

One of the top sub-sectors is natural gas pipeline operators, which basically act as "toll takers" that collect fees for transporting gas. I have decided to pick four MLPs for this article from different sectors. The decision to choose MLPs from different sectors will provide diversification. All of these MLPs have their own set of risks and investors will not be excessively exposed to one type of risk.

Linn Energy (LINE)

  • Linn Energy is involved in production as well as transportation of Energy. In addition to production and transportation, the partnership is also active in the acquisition of new resources. As a result, Linn Energy has considerable protection against the risk of depletion.
  • The biggest risk faced by Linn Energy is the volatile commodity prices. However, the company has an effective hedging program and uses derivative instruments well. As a result, Linn Energy's profits have been guarded against the risk of falling commodity prices. Although recent earnings announcement showed losses due to hedging contracts, these contracts are marked to market and losses are not realized until the contracts are settled.
  • In addition, Linn Energy has a distribution coverage ratio of 1.40X. NGL prices, recent drilling results and acquisitions have impacted the distribution coverage ratio.
  • Recovering commodities market should allow the partnership to report impressive revenue figures as well as healthy cash distributions.
  • At the moment, the partnership pays $2.90 in annual cash distributions, yielding 8.22%. Solid cash generation should allow the company to continue cash distributions.

Sunoco Logistics Partners (NYSE:SXL)

  • Sunoco Logistics Partners has a portfolio of pipelines and terminals that connect refineries to retail distribution systems. The firm also buys and sells crude oil to take advantage of market structures, which works best in periods of high commodity price volatility.
  • Sunoco has a history of consistently increasing its cash distributions. Currently, the partnership pays $2.07 in annual cash distributions, yielding 4.18%.
  • Cash flows are solid for the partnership, and cash flows from operations have shown impressive growth over the past three years. Furthermore, free cash flows provide an adequate cover to its cash distributions. Trailing twelve months cash distributions stand at $242 million, whereas free cash flows for the same period stand at $300 million.
  • The best thing about Sunoco is that its core assets are liquids pipelines that receive inflation-protected annual rate adjustments. In addition, the partnership has made significant capital expenditures, which should increase its distributable cash flows in the future.

Rentech Nitrogen Partners (NYSE:RNF)

  • Rentech Nitrogen Partners is a limited partnership formed by Rentech, a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and grow nitrogen fertilizer business.
  • Rentech has showed impressive revenue growth over the past three years. The partnership reported revenues of $131 million at the end on 2010, which went up to $180 million by the end of 2011. Trailing twelve months revenues stand at $180 million.
  • At the moment, the partnership pays $3.40 in annual cash distributions, yielding 9%. Furthermore, cash flows are in a strong position for the partnership. Trailing twelve months operating cash flows stand at $84 million.
  • Natural gas is the most important component for nitrogen production. Current low price environment in the natural gas market allows the partnership to bring down costs. As long as the natural gas prices remain low, the partnership will continue to benefit and report impressive earnings.


I believe these partnerships will continue to reward their investors in shape of healthy cash distributions and price appreciation. Moreover, all of these partnerships have different risk factors, which reduce the overall exposure to one type of risk. Income investors should take a look at these partnerships before making an investment decision. These partnerships can be a nice addition to an income portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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