High-Yield MLPs: The Good, the Bad and the Ugly — Part 2
The pullback in energy prices has lured many income-seeking investors eager to buy the dip and lock in big yields. We dig into the highest yielders in the MLP space to see which ones are worth buying and which should be avoided at all costs.
Distributions May Vary: The Smart Investor’s Guide to V-MLPs
Many energy-related masted limited partnerships (MLP) own assets that generate reliable cash flow and exhibit limited sensitivity to commodity prices, credit conditions and the state of the economy.
Names that own midstream assets–pipelines and other infrastructure that transport hydrocarbons from the wellhead and prepare them for sale–often generate their cash flow from multiyear agreements that guarantee a minimum payment. Of course, investors must keep tabs on when these contracts end and whether expiring contracts can be renewed at similar, or more favorable, terms.
Whereas publicly traded partnerships usually privilege reliable cash flow and distribution growth, variable-rate MLPs (V-MLP) offer a different value proposition and make no effort to hedge their exposure to commodity prices or economic conditions.
These publicly traded partnerships deliver distribution coverage of 100 percent each quarter, but their payouts will vary depending on the performance of their underlying business.
Most V-MLPs own and operate downstream assets such as refineries or chemical plants–industries where earnings fluctuate with commodity prices and exhibit greater volatility than in the midstream segment.
When V-MLPs’ underlying businesses are in the sweet spot, these names can deliver big-time price appreciation and stratospheric yields of 20 percent to 30 percent; however, if business conditions deteriorate, it’s not unheard of for a V-MLP to omit its quarterly payout entirely.
Here’s our guide to the high risks and rewards in this niche segment of the MLP market.
