Master limited partnerships, also known as MLPs, are attractive to income investors. MLPs widely offer high distribution yields above 5%. A few selected MLPs even have returns above 10%.
Of course, investors should always do their due diligence to ensure that the underlying distribution is secure. Many high-yielding stocks tend to reduce or suspend payouts, especially during recessions.
Therefore, investors should seek a balance between yield and safety when it comes to dividend investments. The following three Master LPs have high yields above 5%, but should also be able to sustain their distributions in a downturn.
|HEP||Holly Energy Partners||$17.24|
|PAA||Plains All US Partners||$11.04|
MLP: Holly Energy Partners (HEP)
Holly Energy Partners (NYSE:HEP) is a mid-tier MLP, meaning it operates crude oil and petroleum transportation and storage facilities. It operates in 10 states, including Texas, Nevada and Washington. HEP also has refineries in Utah and Kansas.
HEP was founded in 2004 by HF Sinclair (NYSE:DINO) and generates revenue by charging customers a fee for transporting and storing petroleum products.
One of the benefits of this business model is that almost all of HEP’s revenue is fee-based. Therefore, these revenues are barely affected by commodity prices. Instead, they are proportional to the volumes transported and stored by the MLP. These volumes are reliable because they are determined by long-term contracts, which impose strict minimums on MLP’s customers.
In addition to organic volume growth, acquisitions are a future growth catalyst for Holly Energy. On March 14, 2022, HEP completed the acquisition of pipelines and terminals from Sinclair Transportation. The agreement includes 1,200 miles of crude oil and product pipelines, eight product terminals and two crude terminals. HEP paid $325 million and issued 21 million common units to pay for the transaction, which is valued at $758 million.
HEP achieves growth through contractual rate escalations, which increase the fees it charges its customers over time, and the addition of new pipelines. HEP has over 800 miles of crude oil gathering facilities in the Permian Basin and can continue to leverage its footprint in this area for years to come.
As HEP currently has a payout coverage ratio of 1.7, we consider the new payout to be safe. The Units currently have a distribution yield of 8%.
Next on our MLP list is MPLX (NYSE:MPLX) is another intermediate MLP that operates in two segments. Its first segment is logistics and storage, which concerns crude oil and refined petroleum products. The second segment is gathering and processing, which stores and transports natural gas and natural gas liquids.
MPLX generated stable financial results in 2022. In the first quarter, net income and distributable cash flow per share increased by 12% and 8%, respectively, compared to the prior year quarter. This strong performance was driven by 4% volume growth in logistics and storage, higher prices and higher volumes in collection and processing.
Pipelines tend to have a stronghold in terms of extracting economic rents. Pipeline construction requires years of approvals and ongoing regulation. As such, incumbent posts benefit from toll-booth-type business models, with much of their revenue set via tariff-based agreements and take-or-pay agreements. MPLX in particular has a strong position in the Marcellus-Utica area, with long-term contracts from Marathon.
MPLX maintained a healthy consolidated debt to adjusted EBITDA ratio of 3.7x and a strong payout coverage ratio of 1.65. These measures represent healthy levels of balance sheet leverage and a sustainable payout. MPLX currently yields 8.7%.
MLP: Plains All American (PAA)
American Plains Pipeline (NASDAQ:PAA) is a midstream energy infrastructure provider. The company has an extensive network of pipeline transportation, terminal, storage and gathering assets in major crude oil and natural gas liquids production basins in major market hubs in the United States and Canada. .
On average, the company handles more than 7 million barrels per day of crude oil and NGLs through 18,370 miles of active pipelines and gathering systems. Plains All American generates approximately $40 billion in annual revenue.
The company has recovered very well from the coronavirus pandemic. In April, Plains All American increased its distribution from 21% to just over 21 cents.
In the first quarter of 2022, revenue of $13.7 billion was up 63% year over year. Growth was driven by rising demand as global demand for oil and gas finally returned to pre-Covid levels. Rising global oil prices also contributed positively, as they nearly doubled year-on-year, with WTI and Brent trading above $100 a barrel.
Finally, increased production in the Permian Basin significantly boosted results, ending the quarter at around 5.2 million barrels per day, compared to 3.7 million barrels a year earlier.
Distributable cash flow increased 11.7% to 56 cents per unit. During the quarter, the company repaid $750 million of senior notes and repurchased 2.4 million common units for $25 million, leaving up to $75 million available for potential discretionary redemptions on the rest of the year. That brought his cumulative redemptions to around $250 million since November 2020.
Following better-than-expected results, management raised its full-year 2022 adjusted EBITDA guidance by $75 million to plus or minus $2.275 billion. The PAA payout rate is currently at relatively comfortable levels, expected to be around 40% for 2022.
The company benefits from certain competitive strengths, including a geographically diverse and interconnected asset base that provides operational flexibility, a high-quality customer base that supports sustainable fee-based cash generation (Marathon Petroleum, Phillips 66, etc.) and a very experienced team. management team.
The energy sector’s recovery from the coronavirus pandemic of the past two years is clear. Oil and gas prices have soared as demand has returned to pre-pandemic territory. This led to a significant improvement for intermediate MLPs.
These three midstream giants have strong business models, quality assets and high payout yields above 5%. In addition, their distributions must be sufficiently covered by distributable cash flow. This makes these MLPs attractive options for income investors.
As of the date of publication, Bob Ciura does not have (neither directly nor indirectly) a position in any of the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Posting Guidelines.