The stock market has become highly volatile this year due to the surge of inflation to multi-decade highs and the ongoing invasion of Russia in Ukraine. It is thus natural that many investors are looking for high-yield stocks, which make it easier to endure tumultuous periods thanks to their generous distributions.

In this article, we will discuss the prospects of three high-yield MLPs, which are currently offering remarkably high yields and can thrive in the current environment of the global energy market.

Cheniere Energy Partners (CQP)

Cheniere Energy Partners is a Master Limited Partnership formed by Cheniere Energy. Cheniere Energy Partners owns and operates regasification facilities at the Sabine Pass liquefied natural gas (LNG) terminal, which is located in Louisiana and provides LNG to energy companies and utilities around the world.

LNG is natural gas in liquid form, a much cleaner fuel than the traditional fossil fuels. As a result, it is much less impacted by the secular shift from fossil fuels to clean energy sources, which has accelerated in the last two years. To be sure, none of the environmental policies that aim to reduce the consumption of fossil fuels aims to reduce the consumption of LNG. The latter is thus likely to continue to replace coal and play a major role in the transition to a cleaner energy landscape.

Cheniere Energy Partners greatly benefits from the secular growth of the global demand for LNG. In 2021, the company enjoyed another tailwind, namely the recovery of the energy market from the pandemic. In the fourth quarter, the MLP grew its earnings per share 24% over the prior year’s quarter thanks to higher LNG volumes and wider margins. It also offered total distributions of $2.66 per share, within its initial guidance of $2.60-$2.70. Those distributions corresponded to an average distribution yield of 6.4%.

Even better, European gas prices have rallied to all-time highs due to the strong dependence of Europe on Russian supplies. As a result, the demand for LNG cargos has skyrocketed and hence Cheniere Energy Partners recently raised its guidance for its annual distribution in 2022 from $3.00-$3.25 to $4.00-$4.25. At the mid-point, the new guidance corresponds to a 7.5% distribution yield. Moreover, the Train 6 of the Sabine Pass Liquefaction project came online in early February. This project will be a material growth driver for the next few years.

Overall, as long as the price of natural gas remains elevated, demand for LNG cargos will remain robust and thus Cheniere Energy Partners will keep thriving. Even when the tailwind from high gas prices attenuates, the company will still benefit from the secular growth of LNG. On the other hand, its distribution may be affected by the cycles of the natural gas market. Therefore, the stock is suitable for income-oriented investors but may be unsuitable for conservative investors, who do not feel comfortable with variable distributions.

MPLX, LP (MPLX)

MPLX is a diversified, large-cap MLP which was formed by Marathon Petroleum (MPC) in 2012. It owns and operates midstream energy infrastructure and logistics assets, and provides fuels distribution services. It operates in two segments: Logistics and Storage, which involves the transportation and storage of crude oil and refined products, and Gathering & Processing, which is related to natural gas and natural gas liquids (NGLs). Logistics and Storage generates approximately 65% of the EBITDA of MPLX.

MPLX has an exceptionally resilient business model. This differentiates the MLP from most energy companies, which are vulnerable to the dramatic cycles of the energy market. MPLX receives fees that are proportional to the volumes transported and stored in its network. It also has long-term contracts with minimum-volume requirements, which secure a minimum amount of fees even if its customers transport and store lower volumes than initially expected. Thanks to its defensive business model, MPLX has proved one of the most resilient oil companies to recessions, including the coronavirus crisis.

MPLX currently enjoys strong business momentum, partly thanks to the recovery of the demand for oil products from the pandemic. In the most recent quarter, the MLP grew its net income and its distributable cash flow per share by 20% and 7%, respectively, over the prior year’s quarter. The strong performance resulted primarily from 18% volume growth in Logistics & Storage as well as higher volumes in Gathering & Processing.

MPLX ended the quarter with a healthy ratio of debt to adjusted EBITDA of 3.7 and a solid distribution coverage ratio of 1.64. It is also worth noting that MPLX raised its distribution every quarter since its formation, until 2020. Due to the pandemic, MPLX froze its distribution for seven consecutive quarters. However, thanks to the ongoing recovery of the energy market, the MLP raised its distribution by 2.5% in the fourth quarter. Overall, the MLP has never cut its distribution. Given also its solid coverage ratio and its healthy balance sheet, its 8.6% distribution yield should be considered safe in the absence of a severe downturn.

Plains All American Pipeline, LP (PAA)

Plains All American Pipeline is a midstream energy infrastructure provider. The company owns an extensive network of pipeline transportation, terminalling, storage, and gathering assets in key crude oil and natural gas liquids basins in the U.S. and Canada. On average, it handles more than 7.0 million barrels per day of crude oil and NGL through 18,370 miles of pipelines and gathering systems.

Plains All American Pipeline has many minimum volume contracts in place and thus it enjoys relatively stable revenues in its transportation segment. These contracts have an average remaining term of approximately 5 years. On the other hand, the performance of the supply and logistics segments of the company is highly sensitive to the underlying demand for oil and gas and hence it is much more volatile. This helps explain why Plains All American Pipeline has exhibited a much more volatile performance record than MPLX and has proved much more vulnerable to the downturns of the energy market.

Due to its sensitivity to downturns, Plains All American Pipeline cut its distribution by 50% in 2020. On the bright side, the stock is still offering an attractive 6.8% distribution yield. Moreover, the company is recovering strongly from the pandemic right now. In the fourth quarter, it more than doubled its revenues and grew its distributable cash flow per unit 24% over the prior year’s quarter. Management recently stated that it may raise the annual distribution by 21% this year, from $0.72 to $0.87. Given the solid payout ratio of 33% and the favorable business conditions, management is likely to deliver on its promise. Even if it does not raise the distribution, the current distribution of 6.8% is certainly attractive and has a wide margin of safety.

Final Thoughts

The above three MLPs currently offer exceptionally attractive distribution yields. In our view, Cheniere Energy Partners and Plains All American Pipeline enjoy impressive business momentum right now but MPLX seems a superior choice, as it is offering the highest yield while it has the most defensive business model in place.