A few weeks ago, on one particularly rough day for the MLP sector, I wondered to myself who had just blown up. With even blue-chip names down 4% or more on the day, the only explanation I could come up with was that a leveraged MLP hedge fund must have “blown up” and been forced to liquidate its holdings due to margin calls, pushing down prices. Nothing else made sense.
I never got an answer to that question, and I will probably never know. But when I see the continued meltdown in the MLP space, I’m still left wondering: What, exactly, are investors thinking when they dump MLPs at today’s prices?
When they can get a 5% current yield or better and distribution growth of 5% to 10% per year for the foreseeable future… where exactly do they expect to find better bargains?
Hey, I get it. The collapse in the price of crude oil is scary. I wouldn’t particularly want to own an upstream exploration and production MLP like Linn Energy (LINE) in this environment. But most of the larger MLPs get most of their revenues from midstream transportation and are mostly insensitive to energy prices. And whatever modest exposure to energy prices they have right now can’t quite justify the 22% decline in the JPMorgan Alerian MLP ETF (AMJ) since early May.
Today, I’m going to take a look at three midstream MLPs that have taken an unjustified beating. All pay fantastic dividends or distributions, and all are expected to see significant growth over the next several years.
Enterprise Products Partners
I’ll start with Enterprise Products Partners (EPD), considered by many, including myself, to be the bluest of blue-chip MLPs. Enterprise Products operates 51,000 miles of oil and gas pipelines in additional to extensive salt-dome storage capacity and marine transportation.
By management estimates, about 85% of Enterprise Products’ income is fee-based, depending on the volume of oil and gas transported rather than the price. And most of EPD’s price sensitivity is due to its natural gas liquids business.
Enterprise Products is down about 23% since early May on no real news. Distributable cash flow for the first half of the year was roughly flat with the same period from 2014.That might have been modestly disappointing to investors hoping for growth, but it’s hardly devastating news.
At today’s prices, Enterprise Products yields 5.9%, and that distribution is about as safe as they come. Its distributable cash flow covers its current distribution by 1.3 times, giving Enterprise plenty of room to grow its distribution even if cash flows fail to grow as quickly as in years past.
Up next is Kinder Morgan (KMI), the only MLP that can compete with Enterprise Products in terms of size and scope.
Kinder Morgan is not technically an “MLP.” It’s a corporation. But I’m comfortable including Kinder Morgan here because, up until last year, this sprawling pipeline empire actually included three underlying MLPs in addition to the general partner.
Like Enterprise, Kinder Morgan has gotten slapped around lately, down about 30% since late April. But this is absurd when you actually take the time read Kinder Morgan’s most recent quarterly earnings release. Kinder Morgan increased its project backlog by $3.7 in the second quarter to $22 billion, meaning that KMI has no shortage of growth prospects in front of it.
During its reorganization last year, management said that it intended to raise KMI’s dividend by at least 10% per year from 2016 to 2020, and they reiterated that call this past quarter. And at today’s prices, the stock yields a whopping 6.4%.
Between the current dividend and the expected growth rate, you should be looking at minimum annual returns of about 16% per year over the next five years. That’s enough to double your money in a market that is expensive and priced to deliver almost nothing in the way of returns over the next decade.
And finally, I get to one of the quirkier companies in the midstream space,Teekay Corporation (TK). Most MLPs own pipelines; Teekay owns tankers. It’s a different vehicle, but it’s the same basic idea. Rather than drill for oil and gas, Teekay simply moves it around.
Like Kinder Morgan, Teekay is technically a corporation and not an MLP. But this is where it gets interesting. Teekay is the general partner of two MLPs, Teekay Offshore Partners (TOO) and Teekay LNG Partners(TGP) and the controlling shareholder of another corporation, Teekay Tankers (TNK).
Rather than continue as an operating entity in its own right, Teekay Corporation is transitioning into a pure-play general partner by dropping its operating assets down into its MLPs. And that can only mean one thing: A big surge in dividend growth.
As part of Teekay’s strategic shift, it boosted its dividend by 70% earlier this year, and management expects annual dividend growth of 15% to 20% over the next three years. Between that stellar growth rate and Teekay’s current 7% dividend, you’re looking at doubling your money in about three years.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.