Top 3 MLPs for High Yield Returns
Master Limited Partnerships are a go-to for investors seeking high yield and we've found three positions with sustainable distributions.
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Investors looking for high yields should consider Master Limited Partnerships (MLPs) as many of them yield 5% or more, even double-digit yields in some cases.
Of course, investors should not simply chase the highest yields — some high-yielding stocks have poor fundamentals and end up cutting their payouts to investors.
This article will discuss three top MLPs that have high yields above 6%, and also sustainable distributions.
1. Plains All American L.P. (PAA)
Plains All American Pipeline, L.P. PAA is a midstream energy infrastructure provider. The company owns an extensive network of pipeline transportation, terminalling, storage and gathering assets in key crude oil and natural gas liquids producing basins at major market hubs in the United States and Canada. On average, it handles more than 7 million barrels per day of crude oil and NGL through 18,370 miles of active pipelines and gathering systems. Plains All American generates around $40 billion in annual revenue and is based in Houston, Texas.
On May 3, 2024, Plains All American reported its Q1 results for the period ending March 31, 2024. For the quarter, revenues came in at $12 billion, down 2.8% compared to last year. Adjusted EBITDA from crude oil increased by 7% year over year, primarily due to higher tariff volumes on U.S. pipelines, tariff escalations and contributions from acquisitions. These items were partially offset by fewer market-based opportunities.
Adjusted EBITDA from NGL decreased 17% versus comparable 2023 results primarily due to lower realized frac spreads. Thus, adjusted EBITDA totaled $718 million for the quarter, relatively unchanged compared to Q1 2023. Distributable cash flows (DCF) rose by 6.3%, $0.67 on a per-unit basis. Management affirmed the partnership’s full-year 2024 guidance, expecting adjusted EBITDA to be between $2.625 billion and $2.725.
We currently expect DCFU growth of 5% in the medium-term, powered by an improving outlook in the energy sector. Beyond 2024, management anticipates targeting annualized common distribution increases of approximately $0.15 per unit each year until reaching a targeted unit distribution coverage ratio of approximately 160%.
PAA’s payout ratio is currently sitting at relatively comfortable levels. Following last year’s distribution cut and clear capital allocation strategy, we don’t expect another one going forward, especially considering management’s intention to grow the annual distribution rate per unit. PAA units currently yield 6.9%.
2. Cheniere Partners LP (CQP)
Cheniere Energy Partners CQP is a Master Limited Partnership formed by Cheniere Energy. CQP owns and operates regasification facilities at the Sabine Pass liquefied natural gas (LNG) terminal, which is in Cameron Parish, Louisiana, providing LNG to energy companies and utilities around the world.
In the 2024 second quarter, its number of LNG cargos rose 2% over the prior year’s quarter but the company incurred material losses in its commodity derivatives. As a result, its earnings plunged 65%, from $1.935 billion to $682 million. European gas prices have remained above average, though they have incurred a sharp correction off blowout levels in 2022. The demand for LNG cargos remains strong but it has somewhat moderated. As a result, CQP reiterated its guidance for an annual distribution of $3.15 to $3.35 in 2024.
CQP has remarkably improved its performance in recent years. It has built six liquefaction trains in its Sabine Pass terminal since 2016. Thanks to improvements in its operations, its current production capacity is 12% higher than the initial nominal capacity. Moreover, CQP completed its sixth train in 2022 and plans to add up to three more trains in the upcoming years. Thanks to the strong demand for LNG cargos, which has resulted from the elevated European gas prices, CQP is likely to post above-average earnings this year.
CQP proved to be one of the most resilient energy companies to the pandemic. It grew its earnings-per-share 3% and raised its distribution 5%, whereas numerous energy companies cut their dividends. CQP also has a decent balance sheet, which is significant during the downturns of its business. CQP units currently yield 6.1%.
3. Star Group L.P. (SGU)
Star Group, L.P. SGU is a home heating oil and propane distributor and services provider. The company was founded in 1995 as Star Gas Partners, L.P., and changed its name to Star Group, L.P. in October 2017. The company's Petro Holdings subsidiary provides heating oil and propane to 416,000 U.S. Northeast and Mid-Atlantic customers. In addition, the company also sells diesel and gasoline to customers across the United States.
Star Group, L.P. is the nation's largest home heating oil retail distributor, giving it a competitive advantage. The company has a strong market position in the home heating oil and propane distribution industry and has maintained a steady market share in recent years. The company operates in two revenue segments: home heating oil and propane and other products and services, including commercial heating and HVAC services, equipment installations and repair and maintenance services.
On May 1, 2024, the company announced its Q2 results for the fiscal year 2024, reporting non-GAAP EPS of $1.56. Additionally, total revenue decreased 9.7% to $666 million from $737.6 million in the same period in the prior year, with the volume sold and the selling prices for petroleum products declining. Home heating oil and propane volume was 117.1 million gallons, falling by 4 million gallons, or 3.3%. Net customer attrition and other factors offset the additional volume from acquisitions due to lower-than-last-year average temperatures: 6.9% colder than last year, yet 15.2% warmer than usual.
Net income increased by $6.3 million to $68.4 million for the quarter due to a $14.8 million favorable swing in the fair value of derivative instruments and a $1.2 million reduction in interest expense; these gains, however, were partially offset by a $5.8 million decrease in Adjusted EBITDA, and a $3.6 million increase in the cost for income taxes. Adjusted EBITDA of $96.3 million was down from $102.2 in fiscal 2023.
Considering the seasonality of this business and the limited growth prospects of the industry, we forecast an EPS of 4.0%, in line with the company's historical averages. The consistent unit reduction throughout the past years has decently rewarded investors with higher earnings yield. Therefore, the company will continue its repurchase program at the same pace. SGU units currently yield 6.2%.
At the time of publication, Ciura had no positions in any securities mentioned.