There's an MLP Bubble to Watch, and Some MLP Opportunities to Explore

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Stocks paying significant dividends have been a favored investment for a couple of years. Such companies have seen their shares advance handsomely. For example, within the real estate investment trusts (REITs) space, some stocks now yield the same or less than household name, and financially strong, mega-cap stocks like Johnson & Johnson. Another area that has seen material price appreciation is the master limited partnership (MLP) space. Investors should tread carefully, but not necessarily avoid the group.

The Alerian MLP Index is a broad benchmark of the MLP industry, tracking the 50 largest MLPs. Since the start of 2009, the index, excluding dividends, has advanced more than 100%. Clearly, investors have taken note of the dividends available in the industry and the generally positive outlook for many of the partnerships within it. For those who got in early, the capital appreciation over the past few years is a wonderful thing. For those just beginning to look at the sector, however, price is an important consideration.

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For example, companies such as Enterprise Products Partners (NYSE: EPD) are now yielding around 5%. While that is a decent yield relative to the broader market, it is on the lower side of history with regard to Enterprise and the broader MLP space. There is much to like about Enterprise and its long-term prospects, particularly in light of the growing demand for domestic energy infrastructure. However, buying it at a 5% yield may not be adequate compensation for long-term investors. Similar situations can be found throughout the midstream pipeline space, which contains some of the largest MLPs.

But it wouldn't be completely fair to say, as some pundits have, that MLPs are in bubble territory. It would be more appropriate to say that midstream companies may be in a bubble. I say this because there are other areas of the MLP space that are nowhere near bubble territory. For example, coal MLPs are almost completely unloved right now. Some Oil and gas drilling MLPs, though not as downtrodden as their coal brethren, are also still yielding in the 7% to 10% range. Financial MLPs, which I don't like because of potential regulatory risks, are also hurting.

So, for investors seeking tax-advantaged dividend paying companies, it would be foolish to disregard the MLP space because one sub-segment is pricey right now.

Some partnerships to consider for their high yields include:

Coal

  • Natural Resource Partners  
  • Rhino Resource Partners
  • Alliance Resource Partners (NASDAQ: ARLP)

Oil/Gas Drillers

  • BreitBurn Energy Partners (NASDAQ: BBEP)
  • LRR Energy
  • Mid-Con Energy Partners
  • Vanguard Natural Resources

Odds and Ends

  • StoneMor Partners (NYSE: STON)
  • Navios Maritime Partners (NYSE: NMM)
  • Ferrellgas Partners

Note that not all of the MLPs above deserve to be in your portfolio. However, they are far from bubble territory and are worth looking at regardless of whether or not you purchase them.

For example, StoneMor is a unique twist on the MLP structure in that it owns cemeteries. Although this is a more complex industry than most imagine, the big twist here is that StoneMor is selling off bits of its land holdings with each sale of a cemetery plot. This, management believes, is similar to an oil company pulling oil out of the ground. One risk investors face is that regulators don't agree, which would require a complete business overhaul and helps to explain the high yield.

Ferrellgas, meanwhile, sells propane. This isn't a growth business, but one in which acquisitions are the name of the game. That said, the industry remains highly fragmented, so there would appear to be plenty of room for the company to continue acting as an industry consolidator. One fact to note is that Ferrellgas has always had a large distribution that seems poised to be cut but never has. Of course, it hasn't grown, either.

Navios Maritime Partners is in the dry bulk shipping space, which has been hard hit of late. It has managed the industry's woes particularly well, however, and seems to be better positioned than most. Still, industry pricing is highly volatile, which is a material risk for the company when its contracts eventually end.

LRR and Mid-Con are relatively new MLPs, which could be hampering their unit prices. These oil and natural gas drillers appear to have solid businesses, but they may need to prove themselves more before investors are willing to afford them a higher multiple. Stepping in early as an investor could result in both big capital gains and big dividends, or, if they don't prove their worth, a big mistake. BreitBurn Energy Partners and Vanguard Natural Resources have both been around longer and have proven themselves, to some degree. However, volatile commodity prices appear to have resulted in share price volatility. For more conservative investors, this pair may be a better starting point than the newbies, but only if you can stomach the ups and downs of a commodity business.

All of the coal companies are being crushed by the fact that coal is an unloved natural resource, at least for the moment. Of the three, Alliance Resource Partners is by far the most conservative. Moreover, it has continued to increase its distribution despite the weak market for its primary product. Rhino, on the other hand, is perhaps the riskiest of the trio. The company recently cut its distribution, but continues to expand operations in coal and, notably, in other areas as a means to diversify its coal exposure. Natural Resource Partners is the odd man out here because it leases out its land and doesn't actually mine any coal. However, this keeps it from having to worry about the risks of mining coal, which are material. It probably lies somewhere between Alliance and Rhino on the risk spectrum. Regardless, if you think coal is eventually going to turn the corner, these three are worth a look.

So investors willing to dig a little deeper can still find some interesting opportunities in the MLP space, despite the fact that the largest companies have run up materially in price. Some of the stocks listed above are on my watch list of high yield opportunities.

Yours,

 

 

 


ReubenGBrewer has positions in Enterprise Products Partners L.P. and Natural Resource Partners. The Motley Fool owns shares of Johnson & Johnson and StoneMor Partners. Motley Fool newsletter services recommend Alliance Resource Partners, L.P., Enterprise Products Partners L.P., Johnson & Johnson, and StoneMor Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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