Protected Principal Retirement Strategy: 3 New MLPs To Consider

Includes: APLP, CLMT, PDH, QRE
by: Akaralph

For the past three weeks I have had the chance to relax and ruminate on a few of the different sectors that together comprise the Protected Principal Retirement portfolio.

I have noticed several articles on various blogs and websites predicting a bubble for the master limited partnerships [MLPs]. Of course, no asset class is immune from this scenario, and as more and more investors gravitate to MLPs, and as more and more new MLPs IPO, I guess the chances for such a bubble to form (and/or burst) increase.

Personally, I continue to believe that the MLPs that have been on the scene for many years with uninterrupted distribution increases will continue along this path, as was the case in 2008 - 2009. Those years, as many of us remember, saw the "best in breed" MLPs have their market values halved; however, the good ones (midstream) continued their distributions, with many continuing to increase payouts.

I would like to present information on three MLPs that I consider worthy of inclusion in the Protected Principal Retirement portfolio.

One of my favorites (see prior articles in this series) is, and has been Calumet Specialty Partners (NASDAQ:CLMT), which has recently run up from the mid - 24's to new highs of over $31 today. I believe that CLMT still has a lot of room for appreciation; however the recent run up has made it a little pricey right now. With a current annualized distribution of $2.36 it still sports a hefty yield in excess of 7.5 percent. My plans are to increase the portfolio's position in CLMT if we get a decent pullback.

I am continually looking for portfolio additions in the MLP sector. Three that I am currently following, but do not as yet own are: Exterran Partners (EXLP), PetroLogistics (NYSE:PDH), and QR Energy (NYSE:QRE).

The following provides a current summary of each.

Exterran Partners

EXLP is heavily oriented to the natural gas service arena. They provide operations, repair and maintenance services, and own and operate a 10 million cubic foot/day natural gas processing plant.

In their conference call for the quarter ending June 2012 they noted that growth has been relatively flat, but could be expected to increase in the third quarter, and accelerate somewhat into the final quarter of 2012. This is due to expanded operations of the general partner in Latin America, the Middle East and Asia, which should lead to increased dropdowns for EXLP.

While quarterly top and bottom line growth have been relatively flat for the past few quarters, distributions have been increased somewhat. The June distribution was raised to $.503 for an annualized distribution of $2.01. I consider this to be a good performance considering that natural gas prices have been in recent decline. Distributable cash flow also showed a small increase and the coverage ratio was 1.20 - a solid number.

EXLPs growth rate for the next quarter is projected to be just over 45 percent and is estimated to be 375 percent for 2012. For 2013, the growth rate estimate is 28.1 percent, so it appears that EXLP going forward is worth consideration for inclusion in the portfolio.


PDH is a newer MLP, having made its debut in May of this year. PDH is in the business of chemical processing and sales, particularly propylene production. They operate the only dedicated propylene plant of its kind in the U.S. today, and expansion is anticipated going forward. PDH's profitability is based upon the price spread between propylene and propane, which is forecast to widen over the coming year.

For the quarter ending this past June, revenues were a bit slow, however growth prospects are strong, and PDH declared a prorated distribution of $.26 ($.45 for an entire quarter).

The IPO was priced at $17 and the stock proceeded to drop in price into the low $10 range, but has recently rebounded to today's price of $13. With distributable cash flow of $62.7 million for the quarter ending June 2012 and an annualized distribution of $1.80, the stock price equates to a present yield of 13.85 percent.

The company recently received a "buy" rating from Dahlman Rose.

While PDH appears to be riskier than some of the other new MLPs, I believe the growth prospects are optimistic, and the stock bears watching (or possibly a little nibble).

QR Energy

QRE is an upstream MLP, and is in the business of exploration and production of onshore oil and natural gas. Its properties are strung out along the southeastern and southwestern U.S. While revenues came in a little light (production increased seven percent in quarter two as compared to the first quarter of 2012) for the past quarter, earnings increased substantially (to say the least). Over the past few years the size of QRE has tripled.

Both oil and natural gas hedges are in place through 2017. Oil is presently hedged at just over $95 and natural gas just over $5. Natural gas liquids account for approximately 14 percent of total production.

Distributable cash flow ($27.7 million) was up 16 percent over the first quarter of 2012, and the coverage ratio was a healthy 1.30.

QRE's five year compound annual growth rate (C.A.G.R.) is five percent.

QRE continues to increase their distribution, and annualizing the $.4875 paid in the June quarter we have a current yield of 10 percent at today's closing price. This morning (Friday 9/28) QRE announced that its coming distribution will be $.4875. Since its ex-dividend date, the stock price has appreciated from the mid-$17 level to its present price of $19.45, so I will be watching for a pullback prior to making an entering purchase.


Of these three I would rate PDH as the most speculative as a portfolio addition; however, they are in a unique position as the country's sole producer of propylene at the present time. EXLP is also unique as an MLP in the service sector and QRE is certainly moving to a prime position within the exploration/production (upstream) area.

With many market analysts opining about a coming market pullback, I would urge caution in buying at the current levels and seek to buy at lower levels.

Disclosure: I am long CLMT. 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.

Additional disclosure: The information presented does not constitute a buy recommendation. I am not a registered investment advisor.