7 High-Yielding Natural Gas MLPs To Consider For 2012

by: Parsimony Investment Research

We continue to believe that MLPs represent solid income-generating assets with great industry fundamentals. MLPs generally offer stable yields that are typically higher than those of common stocks. In addition, MLP returns have traditionally had low correlations with stocks and bonds, making them good portfolio diversification assets. This article is specifically focused on the natural gas pipeline and storage MLPs.

Misconception About Commodity Sensitivity

In general, most MLPs have limited direct commodity sensitivity, since a significant amount of their revenues are derived from fee-based contracts that are largely insensitive to commodity price fluctuations.

However, MLPs do have some secondary commodity exposure. For example, the prevailing level of natural gas prices influences the level of drilling activity surrounding MLP assets that gather, process, and transport natural gas. A sustained decline in natural gas prices would discourage drilling activity, which would depress volumes supporting gathering, processing, and transportation infrastructure.

That said, as shown in the chart below, natural gas prices have been in a confirmed down trend the past few years.

(Click to enlarge)

We believe that natural gas prices will find some stability in the $2.50 - $3.00 range and that near-term price fluctuations will not have a meaningful impact on natural gas pipeline and storage MLPs. As such, we believe that this is a great buying opportunity for these MLPs.

Comparing Natural Gas Pipeline and Storage MLPs

Below is a list of natural gas pipeline and storage MLPs, which have an average dividend yield of 8.4% and an average beta of 0.25. In general, companies with low betas will tend to be less volatile than the general market and will help dampen portfolio volatility.

Stable and Predictable Dividends

As shown in the table below, MLP dividends have been very stable the past 5 years. Note that not one of these MLPs have cut their dividend in the last 5 years.

Disclosure: I am long BWP.