2 High-Yield MLPs With Strong Coverage Ratios

Includes: APLP, ETP
by: Junius

The high yields offered by master limited partnerships have traditionally made them attractive to income investors. However, with the Fed's tapering of asset purchases, there are increasing concerns that MLPs would suffer from rising interest costs. But, with the booming energy sector, MLPs still stand to benefit from rising infrastructure demands. For 2014, investors may need to be more selective in choosing MLPs with lower debt loads and stable coverage ratios. The following MLPs should offer a sustainable yield of around 7%, and have potential for further growth in distributions.

Exterran Partners (EXLP) offers a dividend yield of 7.1% at its current price of $29.70. Exterran Partners recorded third quarter revenue growth of 16.6% and adjusted EBITDA growth of 20.7%. Its 2013 third quarter distribution of $0.5275 per limited partner unit was backed by a distributable cash flow coverage ratio of 1.17x. The coverage ratio for the first nine months of 2013 is even higher, at 1.39x. EXLP has been increasing its distribution by $0.005 per unit for every quarter since the third quarter of 2010. With strong organic revenue growth, improving operational productivity, and a relatively conservative coverage ratio, there is significant potential for higher distribution growth.

Formed by Exterran Holdings (EXH), Exterran Partners is the largest contract gas compression provider in the U.S. Given that gas compression is necessary to facilitate the efficient transport of gas to its end uses, the MLP's revenues are generally stable. This reduces the volatility in distributable cash flow, and helps to ensure that distributions can be made throughout the business cycle. Exterran Partners' scale and its standardized equipment have enabled the company to generate strong and improving EBITDA margins. Adjusted EBITDA margin stood at 48% of revenue for the third quarter of 2013. Debt to adjusted EBITDA is relatively low, at 3.2x. With increasing shale gas production in the U.S., EXLP should see further EBITDA growth in the medium- to long-term.

Energy Transfer Partners (ETP) offers a dividend yield of 6.8% at its current price of $53.95. Energy Transfer Equity, L.P. (NYSE:ETE) is the master limited partnership which owns the general partner and 100% of the incentive distribution rights of Energy Transfer Partners.

ETP owns and operates approximately 43,000 miles of natural gas, natural gas liquids, refined products, and crude oil pipelines. In addition, ETP has stakes in ETP Holdco Corporation and Lone Star NGL LLC, which operates natural gas liquids storage, fractionation and transportation assets. ETP also owns the general partner and 100% of the incentive distribution rights in Sunoco Logistics Partners (NYSE:SXL). SXL is also structured as a MLP, and operates pipelines, terminaling, and marketing assets.

ETP's debt to adjusted EBITDA is higher than Exterran Partners, at 4.3x. But, ETP has commissioned more expansion projects, including a $3.1 billion investment in expanding capacity at the Eagle Ford shale formation in South Texas. Adjusted EBITDA for the third quarter of 2013 rose 42.7% to $942 million, whilst distributable cash flow increased 39.4% to $527 million.

Although ETP had frozen its quarterly distribution at $0.89375 from between 2008 Q2 and 2013 Q2, the partnership is now in a much stronger position to grow distributions, as new projects become operational and benefits from scale start to take effect. Its third quarter distribution of $0.905 per limited partner unit was backed by a distributable cash flow coverage ratio of 1.14x. Its 2013 9M coverage ratio is 1.02x. Although that may not seem particularly high, the ratio has continued to improve from 0.93x for the same period in the prior year. With improving distributable cash flow from robust organic growth and productivity gains, ETP announced that its distribution for the fourth quarter would increase to $0.92 per unit.

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.