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Finding Value among the High Flyers

By Elliott H. Gue on Jun. 17, 2014

MLPs often grow their distributions at an accelerated rate in their first two years as a publicly traded entity. These rising quarterly payouts, coupled with a raft of positive research reports from Wall Street analysts, tend to attract investors’ attention and drive the stock price higher.

At the same time, brokerage and financial websites often misreport recently listed MLPs’ yield until the firm has paid a full year’s worth of distributions. This quirk gives investors an opportunity to buy these stocks before the herd realizes how much the units yield.

But investors have caught on to these opportunities. Meanwhile, high-profile asset spin-offs from independent refiners have attracted huge investment inflows, thanks to their visible pipelines of potential drop-down transactions.

Consider Phillips 66 Partners LP (NYSE: PSXP), which has surged almost 190 percent since its IPO on July 22, 2013; not only did many institutional investors struggle to get an allocation this highly anticipated offering, but the MLP also offers a current yield of 1.6 percent–the stock has priced in a lot of upside.

A more fruitful strategy for individual investors has been to focus on nontraditional MLPs such as Hi-Crush Partners LP (NYSE: HCLP), the first publicly traded partnership to specialize in the silica sand used in hydraulic fracturing.

Investors were less familiar with this niche industry and its growth prospects; the stock didn’t start to take off in earnest until about 10 months after its debut on the New York Stock Exchange.

Similar logic applies to one of the hottest IPOs of 2012, Alon USA Partners LP (NYSE: ALDW), which delivered a total return of 50.4 percent that year but slumped to a 21 percent loss in 2013 after omitting its November distribution.

Alon USA Partners is a new breed of publicly traded partnership that doesn’t target reliable distribution growth but pays a variable distribution that fluctuates based on the MLP’s underlying cash flow.

Like many variable-rate MLPs (V-MLP), Alon USA Partners owns a single revenue-producing asset: the 70,000 barrels per day Big Spring refinery in the heat of west Texas’s Permian Basin, one of the largest and fastest-growing oil-producing regions in the US.

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