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MLP IPOs Still Hot, But Selectivity is Key to Outperformance

By Peter Staas on Oct. 19, 2014
MLP Class of 2014 TRA -- Small

Investors flock to MLPs for their above-average yields and exposure to the US shale oil and gas revolution. But instead of simply picking the highest-yielding stocks, investors should consider the potential for price appreciation.

From 2011 to 2013, price appreciation accounted for an average of 87 percent of the total return posted by the top-performing MLPs from each year. Thus far in 2014, climbing unit prices have contributed 94.8 percent of the total return posted by the top 10 top-performing publicly traded partnerships.

A surging unit price also benefits the MLP, which enjoys a lower cost of equity capital relative to higher-yielding peers.

In the aftermath of Lehman Brothers declaring bankruptcy, fear ran rampant and commodity prices collapsed, giving investors an opportunity to lock in double digit yields on Enterprise Products Partners LP (NYSE: EPD) and other high-quality names.

Publicly traded partnerships with exposure to commodity prices–producers such as Vanguard Natural Resources LLC (NSDQ: VNR) and gathering-and-processing outfits such as MarkWest Energy Partners LP (NYSE: MWE)–suffered the biggest hit during the 2008-09 panic and offered truly gargantuan yields.

In the subsequent recovery rally, the Alerian MLP Index–a capitalization-weighted basket of 59 prominent partnerships–delivered a record 75 percent return in 2009, while MarkWest Energy Partners and other hard-hit names generated total returns in excess of 250 percent.

Over the past three years, investors seeking differentiated returns have found recent initial public offerings (IPO) in the MLP space to be a fruitful hunting ground.

In 2011, two fledgling MLPs–Golar LNG Partners LP (NYSE: GMLP) and Tesoro Logistics LP (NYSE: TLLP)–cracked the list of that year’s top 10 performers. This number increased to six in 2012 and four in 2013. And thus far in 2014, IPOs that priced within the past 12 months have accounted for four of the top-performing MLPs.

Why do newly listed publicly traded partnerships tend to outperform?

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.

In the past, investing in fledgling publicly traded partnerships has proved to be a winning proposition and an opportunity to find value. However, investors should be forewarned selectivity is critical to this strategy’s success.

As you can see from our graph, not every MLP IPO from this year’s class has fared well.

(Click graph to enlarge.)MLP Class of 2014 TRA

But Dominion Midstream Partners LP’s (NYSE: DM) strong performance in a challenging tape for energy-related stocks underscores the market’s appetite for high-quality MLPs making their public debuts.

We delved into GasLog Partners LP (NYSE: GLOP), Cypress Energy Partners LP (NYSE: CELP), Viper Energy Partners LP (NSDQ: VNOM) and Foresight Energy Partners LP (NYSE: FELP) in The MLP Class of 2014, Part 1.

Our second installment in this series includes our in-depth assessments of Enable Midstream Partners LP (NYSE: ENBL), PBF Logistics LP (NYSE: PBFX), NextEra Energy Partners LP (NYSE: NEP), Westlake Chemical Partners LP (NYSE: WLKP), Shell Midstream Partners LP (NYSE: SHLX) and Antero Midstream Partners LP (NYSE: AM).

In the next issue of Energy & Income Advisor, we’ll dig into the following MLP IPOs and prospective publicly traded partnerships:

Priced

  • Cone Midstream Partners LP (NYSE: CNNX)
  • Hoegh LNG Partners LP (NYSE HMLP)
  • JP Energy Partners LP (NYSE: JPEP)
  • Transocean Partners LLC (NYSE: RIGP)
  • USD Partners LP (NYSE: USDP)
  • VTTI Energy LP (NYSE: VTTI)

Forthcoming

  • Columbia Pipeline Partners LP (NYSE: CPPL)
  • Exmar Energy Partners LP
  • Hess Midstream Partners LP (NYSE: HESM)
  • Mammoth Energy Partners LP (NYSE: TUSK)
  • Navios Maritime Midstream Partners LP
  • Ocean Rig Partners LP
  • PennTex Midstream Partners LP (NYSE: PTXP)
  • PES Logistics Partners LP

 

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