3 Less-Known MLPs With Strong Growth Prospects

Includes: LGCY, MMLP, PVR
by: Efsinvestment

By Siraj Sarwar

As Fed goes on with its zero interest rate policy, income-oriented investors are having a tough time finding investments that generate substantial cash flows. Traditional sources of income, such as certificates of deposits, money market funds and treasury bonds are all producing disappointingly small yields. In fact, some of these instruments are actually yielding lower returns than the current rate of inflation. To that end, it makes sense for investors to enrich their portfolios with Master Limited Partnerships [MLPs].

MLPs receive special tax treatments as long as they return 90% of their total income to shareholders. These entities are treated as partnerships not corporations, for tax purposes. As such, Master Limited Partnerships enjoy a lower cost of capital and avoid dividend double taxation. Kinder Morgan stocks are among the most well known partnerships. There are also several alternatives to the popular stocks among the MLP space.

In this article, I pick three less-known MLPs with solid financials, which offer substantial distributions. All three of these MLPs offer an attractive dividend yield over 8%. These are Martin Midstream Partners L.P (NASDAQ:MMLP), Penn Virginia Resource Partners L.P., (NYSE:PVR) and Legacy Partners L.P (NASDAQ:LGCY). These MLPs have a long history of paying nifty dividends to the investors. They also have strong business models.

Martin Midstream Partners L.P. is a limited partnership with a diverse set of operations focused mainly in the United States Gulf Coast region. Martin Midstream engages in the distribution, storage and transportation of petroleum products and by-products.

Currently, the company offers an enormous dividend of $3.08 per unit, yielding at 8.82%. Martin Midstream has been steadily increasing its dividends over the years. Recently, it announced a quarterly dividend of $0.77 cent/share. The partnership maintained a similar dividend over the previous quarter.

The partnership is currently paying one of the highest dividends. However, it is not increasing its dividend at a high rate. I think this is mainly due to the partnership's aggressive and ambitious business plan. The company has aggressive business plans at present. The partnership is currently working on an expansion plan and is strongly making acquisitions to increase both its production and reserves.

The expansion strategy has worked fine so far. Revenues and earnings are heading towards new highs year after year. Recently, Martin Midstream announced Q3 earnings with profits of $72.4 million or $3.07 million per unit. In the previous year's quarter, the partnership generated a net income of $5.4 million or $0.20 per unit.

Furthermore, Martin Midstream has been showing exceptional revenue growth over the years. All four business segments of the partnership are growing at a fast pace. For the first nine months of 2012, the partnership revenue stands at $65,107 million compared with $56,831 million in the earlier year. Moreover, in the past five years, Martin Midstream increased its revenue at annual rate of 16.50%.

In the previous nine months, the partnership's operations were positively impacted by new infrastructure at its Corpus Christi crude oil terminal and vacuum tower unit. Both of these assets have quickly exceeded initial cash flow run-rate expectations.

Martin Midstream is a safe and strong pick for an income-focused portfolio. The company is markedly benefiting from its recent acquisitions. At present, the company is seeking to expand its size to increase production. Since the partnership is making significant capital expenditures, the dividend growth has been somewhat unstable recently. However, the partnership is now well positioned to again raise distributions as the acquisitions start to contribute.

PVR Partners, L.P owns and operates a network of natural gas midstream pipelines and processing plants. Additionally, the partnership owns and manages both coal and natural resource properties.

Recently, the partnership declared a quarterly cash distribution of $0.55 per common unit. This represents an increase of 1.9% over the previous quarter and 7.8% over the prior year's quarter. PVR Partners' annual dividend stands at $2.20 per unit, yielding at 8.38%. Moreover, the partnership has been consistently raising its dividend each quarter over the years.

Furthermore, the partnership has been showing exceptional revenue growth over the years. In 2009, the partnership revenue was standing at $657 million, which greatly increased to $1,160 million by the end of 2011. Due to the currently depressed Natural Gas Liquids [NGL] prices and challenges in the coal market, the partnership's recent sales were also affected by some extent.

On the other hand, PVR Partners showed a solid growth in its Eastern Midstream business segment. The partnership has been benefiting greatly by its acquisitions of Chief Gathering and an internal growth project in the Marcellus. At the end of Q3, the partnership generated adjusted EBTIDA from Eastern Midstream of $21.4 million, compared to $6.6 million in the previous year's quarter.

Furthermore, PVR Partners has been investing heavily in available growth opportunities. At the end of Q3, the partnership invested $150 million in internal growth projects. The partnership was expected to spend nearly $485 million in its internal growth projects by the end of 2012. Due to these hefty raises in its capital expenditure, the partnership's free cash flows were negative at $254 million in the last 12 months.

I believe, with the new projects and contracts, the partnership will be getting 80 percent of midstream long-term fixed fee contracts. While in 2011, long-term fixed-fee contracts were standing at 30%. The switch to the long-term fee-based contracts will eliminate the partnership's commodity price fluctuation risks from natural gas.

In addition, the partnership raised its payouts by 8% year over a year. I expect the partnership to raise its distributions Q/Q. The partnership expects revenue to grow over 30% by the end of 2013, as the new projects come online.

Legacy Reserves L.P. focused mainly on the development and acquisition of oil and natural gas properties situated in the Mid-continent, Permian Basin and Rocky Mountains regions of the United States.

Its proven track record and long-lived reserve base contribute towards the twin objectives of providing stability and growth in distributions to shareholders. Recently, the partnership announced a quarterly dividend of $0.57 per unit. The partnership offers one of the best available annual dividends of 2.28 per unit, yielding at 8.63%.

The partnership has been showing exceptional revenue growth over the years. At the end of Q3, the partnership's production increased by 3% over the previous year's quarter. The results were positively impacted by earlier acquisitions. The company produced nearly $105 million from the acquisitions closed in the second quarter alone. I believe the company is strongly benefiting from its ongoing capital program.

Since 2010, the company has been making massive acquisitions to increase production. Moreover, the partnership is also engaged in massive capital spending on the maintenance of its properties. Recently, it announced a capital budget of $90 million of which the partnership plans to spend $69 million on maintenance.

Legacy's decided to spend $69 million on the maintenance of its properties. This will timely develop all its existing assets, which will further enhance the partnership's business prospects. These initiatives will also positively impact the distributable cash flows. I believe that with its recent acquisitions and growing capital expenditure, the company is well-positioned to increase its dividends in the future.

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 Siraj Sarwar, one of our equity analysts. 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.