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The MLP Class of 2014, Part 2

By Elliott H. Gue on Jul. 28, 2014

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, recent IPOs have accounted for four of the top-performing MLPs.

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.

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 this issue, we highlight three forthcoming IPOs that investors should put on their shopping lists and delve into the remainder of this year’s debutants.

We covered 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 July 18 issue of Energy & Income Advisor.

Energy & Income Advisor

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In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.

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