Earning 45% In A Low-Risk MLP
- I reiterate a fundamental value thesis for Green Plains Partners.
- I outline my trading plan that has helped to earn 45% in this name over the past year.
- I discuss one key risk that could affect unitholder value.
- Members of my private investing community, Commodity Conquest, receive real-time trade alerts on this idea and many more. Learn more today >>
A little over a year ago, I published an article entitled, “The Best Value in Biofuels.” In this article, I outlined why I believed that Green Plains Partners (NASDAQ:GPP) was the best risk-reward investment in an industry that I have worked in and researched for over a decade. Both then and now, GPP is a low-risk, high dividend yield opportunity.
Since that article, the buy-and-hold dividend-adjusted returns for Green Plains (shown in the chart below) has ranged from a high of 10% in late July 2017 to a 8% low in December 2017, to a 2.5% investment loss at the close on 8/3/18. This chart shows distribution-adjusted values FYI.
Over the same period that a buy-and hold investor would have lost 2.5%, I have earned 45% by buying the GPP dips and selling the rips.
I have had confidence to buy the washout dips because I still consider GPP to be a low-risk, high yield investment. I outlined the reasons in last year’s article, and my overall value thesis has not changed:
- GPP's revenues are guaranteed by its parent in a mandated market;
- GPP's cash distributions have increased every year since its IPO; and
- GPP has take-or-pay agreements for a large majority of its revenues.
GPP analysts who express concern about declining volumes for GPP may not fully understand the nature of GPP’s take-or-pay contracts with its parent Green Plains, Inc. (NASDAQ:GPRE).
As a quick aside, I do believe that REX American Resources (REX) is currently the best fundamental value in biofuels. I outlined my long thesis for REX in this article which is behind Seeking Alpha’s paywall.
Many investors recognize that the stock market doesn’t seem care much about fundamentals: silly things like earnings and cashflow. As a result, fundamental deep value plays like REX and GPP are best managed with an eye on technical factors and rules-based investing.
My rule for investing in GPP over the past year has been fairly simple: I enter on dips that have a high dividend yield, and exit on technical strength after I have achieved a return near the expected yield. By following this rule, I earned 45% in this low-risk name.
All of my purchases and sales were shared the same day in my subscription service, so this can all be verified with my online trading log.
The chart below highlights the days that I purchased and sold GPP over the past year.
The 45% figure assumes that I re-invest the profits from the first sale to the second and so forth, as shown below.
I have recently made two more purchases of GPP and am intending to hold until I earn 12% - whether through distributions or a rally in price.
GPP's cash distributions
GPP's cash distributions have increased every year since its IPO in 2015.
Source: GPP Quarterly Reports
If GPP merely keeps its distribution constant at $0.475/share, then investors who own at 8/3/18 closing price of $16.15/share have a current forward distribution yield of 11.8%.
Comparison to Alerian MLP Index
In its 2017 annual report, GPP published the performance of its shares versus the S&P index and the Alerian MLP Index. GPP has significantly out-performed both since its IPO.
Source: Green Plains Partners 2017 Annual Report
Potential Effects on GPP of GPRE plant divestitures
GPRE has publicly stated that it intends to sell some of its ethanol production assets, and also told analysts in its recent conference call that announcements could be made sometime later this year. Here is an important Q&A on this topic from the conference call:
Source: Seeking Alpha Transcript.
Therefore, there is some uncertainty for GPP unitholders with respect to the outcome of GPRE divestitures. Nevertheless, I believe that GPP unitholders will be kept whole due to the strength of their counterpary contracts and the nature of the MLP investment vehicle. Management will be careful to preserve the integrity of the MLP structure when agreeing to any divestitures.
In addition, GPRE/GPP management and directors own over $2.0 million in GPP units, so their incentives might be considered to be aligned with other GPP unit-holders.
Disclaimer and Notes
All charts above were taken from TradingView unless otherwise indicated, and all tables were created by Viking Analytics unless otherwise indicated.
We encourage readers to do their own research and come to their own conclusions on this investment opportunity. An investment in an MLP will come with tax complexity that is different for each investor. Please consult with a tax advisor before investing in any partnership.
This article was written for information purposes, and is not a recommendation to buy or sell any securities. All my articles are subject to the disclaimer found here.
In my Commodity Conquest service, I publish a daily commodity report for gold, crude oil, natural gas, and agriculture. I also do in-depth coverage of eight energy firms.
My verifiable trading record from on all completed trades through July 18th includes a win rate of 88% on my stock coverage trades, with an average return of 9.2% on an average hold period of 33 days.
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Analyst’s Disclosure: I am/we are long GPP. 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.
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