EC The 10 Highest Yielding MLPs Analyzed For Income Investors

ETP Growth

Source: 2018 UBS Conference Presentation, page 14

One of the most important projects for Energy Transfer is the Rover project, of which it owns approximately 33%. Rover is now capable of transporting more than 1.7 Bcf per day, with the goal of total storage capacity of 3.25 Bcf per day by the second quarter of 2018.

Separately, Energy Transfer’s Red Bluff Express pipeline is under construction, and it will consist of 80 miles of pipeline, with capacity of at least 1.4 Bcf per day. It is expected to be online in the second quarter of 2018. The company is also expanding its Permian Express 3, which has the potential to add an additional 200,000 barrels per day of capacity.

Energy Transfer had a leverage ratio of 3.98x last quarter, which indicates a manageable level of debt. In addition, the company had a distribution coverage ratio of 1.15x last quarter, more than covering the distribution with cash flow. Energy Transfer appears to be one of the stronger high-yielding MLPs, and is an attractive option for income investors.

High-Yield MLP No. 2: NGL Energy Partners (NGL)

Distribution Yield: 14.4%

NGL Energy Partners is a diversified energy company. It owns and operates a vertically integrated energy business with five primary businesses: water solutions, crude oil logistics, NGL logistics, refined products/renewables and retail propane.

NGL Overview

Source: 2018 Investor Presentation, page 4

On 2/9/18, NGL reported quarterly financial results. Distributable cash flow declined 20% from the same quarter a year ago. Performance was adversely affected by declining volumes in ethanol and biodiesel. Liquids segment performance was negatively impacted by unrecovered railcar fleet costs, and excess storage capacity.

Over the first three quarters of the current fiscal year, adjusted EBITDA declined 3%. Distributable cash flow declined 43%, due largely to a 47% increase in interest expense, and a 49% increase in maintenance capital expenditures.

NGL has taken measures to reduce its debt load, which will help secure its high distribution. For example, the company sold a portion of its Retail Propane business to DCC LPG for $220 million in cash, which the company utilized to reduce debt. It also sold its 50% interest in the Glass Mountain Pipeline to a fund managed by BlackRock Real Assets, for $300 million.

The company expects its debt-reduction efforts will reduce its leverage ratio to 3.25x, and also allow it to achieve an investment-grade credit rating. Until then, investors should view the distribution with some skepticism. The company currently has a leverage ratio of 5.1x, as of the most recent quarter. In addition, the distribution coverage ratio of 0.70x in the past 12 months is a clear warning sign that the distribution may not be sustainable.

High-Yield MLP No. 1: Summit Midstream Partners (SMLP)

Distribution Yield: 14.4%

Summit Midstream Partners is the highest-yielding MLP in our database, with a market capitalization over $1 billion. It owns and operates midstream energy assets in unconventional resource basins, such as shale formations. It provides natural gas, crude oil and produced water gathering services, primarily under long-term and fee-based gathering and processing agreements.

Summit has five core areas of operation in the U.S., which are the Utica Shale, the Williston Basin, the Piceance/DJ Basins, the Barnett Shale, and the Marcellus Shale. The company has natural gas capacity of 1.6 billion cubic feet per day, along with 76,000 barrels per day of liquids throughput volumes. The core areas of operation have strong fundamentals.

SMLP Fundamentals

Source: 2018 Investor Presentation, page 7

Among Summit’s growth initiatives are the start-up of the Delaware gathering and processing plant, expected in the 2018 third quarter, and an expansion project in the DJ Basin expected to ramp up in the fourth quarter. The company also notes expanded well drilling at the Williston Basin, which should lead to higher transportation volumes in that region.

The company did not get off to a good start to 2018. First-quarter adjusted EBITDA and DCF declined 1.5% and 17%, respectively, from the same quarter last year. The declines were due to a recent contract amendment with a Piceance/DJ Basins customer which required this customer to make monthly payments, rather than what historically had been an annual payment in the first quarter of the year.

Summit currently pays a quarterly distribution of $0.575, and it has not increased its distribution since 2015. But with a yield exceeding 14%, even a flat distribution can generate strong returns for investors. However, the company had a distribution coverage ratio of 0.98x in the 2018 first quarter, which means it did not generate enough DCF to fully cover the distribution.

Helping to boost distribution sustainability is the company’s relatively low level of debt. Summit ended the 2018 first quarter with a leverage ratio of 3.63x, which is fairly low for a midstream MLP.

Still, Summit has a credit rating of BB- from Standard & Poor’s, a non-investment grade credit rating that elevates the company’s cost of capital. With a sub-investment grade credit rating and weak coverage, investors should be aware that the dividend may be cut in the future, if DCF growth does not meet expectations.

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