EC The 10 Highest Yielding MLPs Analyzed For Income Investors

GMLP Overview

Source: 2018 Evercore ISI Energy Summit, page 3

Golar’s long-term growth proposition is driven by compelling fundamentals for natural gas. According to the company, gas is cheaper to produce than oil, and is cleaner than many other fossil fuels. Demand for LNG is growing at a high rate, particularly in the emerging markets. Golar expects global LNG demand to increase at a 5% annual rate going forward.

New projects are critical to Golar’s future growth plans. On that front, the company recently shipped first cargo from a major LNG project in Cameroon. Golar has an eight-year supply agreement with Gazprom (OGZPY). Golar hopes to roll out similar plants in Equatorial Guinea, and in Senegal.

However, Golar’s financial performance in recent years left a lot to be desired. For example, in 2017 the company reported a net loss of $145 million. It has reported net losses each year since 2014.

Golar currently pays a quarterly dividend of $0.5775 per share, which works out to $2.31 per share annualized. This results in a huge yield above 11%, but investors should also be concerned with sustainability of the dividend. Fortunately, things look better from the perspective of distributable cash flow. Golar had a DCF coverage ratio of 1.2 in 2017, but with a debt-to-EBITDA ratio of 4.0, the company also has a significant amount of debt on the balance sheet.

Golar is an example of a high-risk, high-reward stock.

High-Yield MLP No. 7: USA Compression Partners (USAC)

Distribution Yield: 11.5%

USA Compression Partners is one of the largest providers of compression services in the U.S. It partners with natural gas and crude oil producers and transporters to provide compression services. Compression helps move oil and gas through pipeline systems, and enhances oil and gas production and transportation.

The company has a significant presence in some of the highest-quality oil and gas fields in the U.S., including the Permian, Marcellus, Haynesville, and Eagle Ford regions.

Another benefit of compression service is that it is largely unaffected by commodity prices. By servicing mostly midstream infrastructure such as pipelines, USA Compression Partners’ cash flow is based more heavily on demand. Fortunately, the company’s utilization has remained above 93% for more than a decade.

USAC Demand

Source: Wells Fargo MLP Symposium, page 6

On 3/15/18, the Federal Energy Regulatory Commission (FERC) announced that it will no longer allow interstate pipelines owned by MLPs to recover an income tax allowance in the cost of service. In response to this announcement, USA Compression Partners stated that it does not currently provide services pursuant to FERC jurisdictional cost of service-based rates or own any interstate pipelines. As a result, the company does not expect any negative impact by the FERC announcement.

On 5/9/18, USA Compression Partners announced strong first-quarter results. Adjusted EBITDA was $44.1 million for the first quarter of 2018, an increase of 22% from $36.0 million for the first quarter of 2017. Distributable cash flow was $33.7 million, up 24% from the same quarter a year ago.

USA Compression Partners has a high yield above 11%, but investors should be aware that the company had a DCF coverage ratio of just 1.03x in the first quarter. This is a tight coverage ratio, and it indicates that the company barely generated enough cash flow to cover its distribution. Like Golar, USA Compression Partners is better served for investors with a high tolerance for risk.

High-Yield MLP No. 6: Sunoco LP (SUN)

Distribution Yield: 12.4%

Sunoco distributes motor fuel to convenience stores, independent dealers, commercial customers and distributors located in more than 30 U.S. states at approximately 9,200 sites. The company’s General Partner is owned by Energy Transfer Equity (ETE).

The company has three separate and stable income streams that contribute cash flow.

SUN Revenue

Source: 2018 Investor Presentation, page 8

In 2017, Sunoco had adjusted EBITDA of $732 million, an increase of 10% from 2016, while distributable cash flow increased 21% for the year. Growth was due to higher fuel prices as well as higher gallons sold. Sunoco’s momentum slowed somewhat in the 2018 first quarter. Sunoco reported adjusted DCF of $85 million, up 10% from $77 million in the same quarter a year ago. The first-quarter increase was due to lower interest expense and lower maintenance capital spending.

Sunoco’s main growth strategy is to grow the core fuel distribution business and add fee-based refined product terminals into its portfolio. An example of this is the recent acquisition of multiple assets from Superior Plus Corporation. The assets consist of a network of approximately 100 dealers, several hundred commercial contracts and three terminals, which are connected to major pipelines serving the Upstate New York market.

The wholesale fuels business sells approximately 200 million gallons of fuel annually through multiple channels. The three terminals have a combined 17 tanks with 429 thousand barrels of storage capacity. The acquisition is expected to be immediately accretive to Sunoco with respect to distributable cash flow.

Sunoco has a very high distribution yield above 12%, but there are warning signs. In the past four quarters, the company had DCF coverage of 1.22x, but coverage eroded to just 1.0x in the 2018 first quarter. Investors need to closely monitor the company’s results in future quarters to make sure coverage rises.

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