EC The 10 Highest Yielding MLPs Analyzed For Income Investors

High-Yield MLP No. 5: Alliance Resource Partners LP (ARLP)

Distribution Yield: 11.3%

Alliance Resource is a coal mining company, and it was the first coal MLP. The company operates nine mining complexes in Illinois, Indiana, Kentucky, Maryland, and West Virginia. Its production facilities are located in two coal-producing regions, Appalachia and the Illinois Basin.

The past few years have been very difficult for Alliance Resource. Revenue declined significantly in 2015 and 2016, as demand for coal dropped. Many utilities across the U.S. have transitioned from coal to natural gas as a source of electricity generation. Alliance Resource kept growing production through this time, but weak pricing and soft demand more than outweighed the benefits of rising output.

Alliance Resource has two major competitive advantages, which at least helped the company stay afloat while so many other coal miners have gone bankrupt in recent years. First, the company’s coal mines are situated close to its industrial customers. This helps keep distribution and transportation costs low.

Second, Alliance Resource primarily produces thermal coal, which is used to generate electricity. The economics of thermal coal have remained intact relative to metallurgical coal, which is used to produce iron and steel.

While the company cut its quarterly distribution by 35% in 2016, to $0.4375 per unit, it has returned to distribution growth since then. Alliance Resource has increased its distribution for four quarters in a row, and now pays a quarterly distribution of $0.515 per unit, or $2.06 per unit.

Still, the challenging macroeconomic environment for Alliance Resource has kept a lid on its growth opportunities. For the 2018 first quarter, reduced coal sales volumes and prices resulted in a 3.4% revenue decline. Lower sales volumes were due to weather-related transportation disruptions. Fortunately, Alliance Resource is actively pursuing exports to fuel growth. The company has now booked contracts to export 6.8 million tons of thermal coal and 490,000 tons of metallurgical coal in 2018.

The company expects to increase its distribution by 4% in 2018. Alliance Resource had a payout ratio of 67% in 2017, which indicates the distribution is sustainable.

High-Yield MLP No. 4: Buckeye Partners (BPL)

Distribution Yield: 13.4%

Buckeye Partners is a midstream MLP. It has approximately 6,000 miles of pipelines, and more than 135 liquid petroleum product terminals, with over 176 million barrels of total storage capacity. Approximately 95% of EBITDA is derived from fee-based sources.

BPL Overview

Source: 2018 Investor Presentation, page 4

Buckeye’s portfolio of pipelines and terminals is located in the East Coast, Midwest, and Gulf Coast regions of the U.S. It also has a significant international presence, with a 50% interest in VTTI. In 2017, adjusted EBITDA and DCF rose 8.3% and 0.7%, respectively. However, performance deteriorated to start 2018. In the first quarter, adjusted EBITDA declined 5.7% year-over-year, while DCF fell 11%. The company’s distribution coverage ratio was just 0.91x in the first quarter, which is a bad sign.

Buckeye’s growth will be fueled by new projects. For example, its South Texas Gateway project calls for construction of a 600-mile long-haul pipeline, with total expected capacity of up to 400,000 barrels per day.

BPL Growth

Source: 2018 Investor Presentation, page 19

Once the project is completed, it will significantly expand Buckeye’s distribution capabilities in the high-quality Permian Basin. The project is set for completion in 2019. Buckeye is also considering a natural gas liquids pipeline in the Permian, to further add to its presence in one of the most attractive oilfields in the U.S.

Another project set to ramp up in the near-term is the Michigan/Ohio expansion project. The company has secured 10-year commitments from oil customers, totaling 50,500 barrels per day. Phase two of the project, expected to be completed by the end of 2018, is projected to add another 40,000 barrels per day of capacity.

Buckeye reported a distribution coverage ratio of 1.0 for 2017, and coverage weakened to 0.91x in the 2018 first quarter. The company also has a debt-to-adjusted EBITDA ratio of 4.41x, which is slightly high but manageable. Investors should closely monitor company reports to make sure the company increases its DCF enough to once again cover the distribution.

High-Yield MLP No. 3: Energy Transfer Partners (ETP)

Distribution Yield: 11.7%

Energy Transfer Partners owns and operates crude oil, natural gas liquids, natural gas, and refined product transportation and storage assets. It also owns NGL fractionation assets. The company has a large network of assets, which includes over 70,000 miles of pipelines.

ETP Overview

Source: 2018 UBS Conference Presentation, page 6

In 2017, Energy Transfer generated adjusted distributable cash flow per unit of $3.60. This was a 4.3% increase from DCF-per-unit of $3.45 in 2017. Growth was primarily due to higher throughput volumes, and higher commodity prices. Energy Transfer’s strong performance has continued in 2018. On 5/9/18, Energy Transfer released first-quarter earnings. Adjusted EBITDA and distributable cash flow increased 30% and 40%, respectively, from the same quarter a year ago.

The major growth catalyst for Energy Transfer Partners is new pipeline projects. Fortunately, Energy Transfer has an impressive lineup of growth projects, several of which are ramping up, while others are still in the construction phase and moving towards completion.

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