MLP Metrics That Matter: Distribution Coverage Ratio
Master limited partnerships have been luring investors with their high yields and reliable distributions for years now. Sometimes, however, we get caught up in the yield and forget how important a reliable distribution really is. That's why today we're focusing on the reliability of the distributions at three petroleum transportation MLPs: Phillips 66 Partners , Genesis Energy , and Sunoco Logistics Partners .
The magic metric that gives us a sense of an MLP's ability to make its distributions every quarter is the distribution coverage ratio, which is simply an MLP's distributable cash flow divided by the total amount of distributions it paid out. Let's look at the third-quarter data for our partnerships:
Phillips 66 Partners
Source: Company releases. Dollar figures in millions.
This is a pretty strong group. Only one partnership failed to cover its distributions. It's not too surprising, given that oil pipeline operators tend to have reliable income streams that allow their management teams to plan accordingly and cover their distributions.
Ratings agencies like Standard & Poor's like to see coverage ratios between 1.0 and 1.1 times payouts for pipeline MLPs, and while Genesis Energy falls short this quarter, it's still clear of 1.0 times coverage for the full year and shouldn't have any trouble in that regard. The partnership had a subpar third quarter because of a number of factors, including the impact of refinery turnarounds on volumes, and low commodity prices, which significantly hampered margins in its supply and logistics segment.
Phillips 66 Partners, on the other hand, did quite well in its first quarterly report since going public in July. Despite a relatively low yield for this space, the partnership had a massive IPO and has garnered quite a bit of attention from the investment community. At this point, investors simply want to know what exactly is in store for this young MLP with no debt. Dropdowns from its parent company yes, but what, and when, remains to be seen.
That brings us to Sunoco Logistics, an MLP that managed to thrive after its parent company, Sunoco, threw in the towel. Not only did Sunoco Logistics post plenty of coverage this quarter, but it a;sp did so after increasing its distribution 22% year over year, and it also managed to end the quarter with a debt-to-adjusted EBITDA ratio of 2.5 times. It's yielding only 3.6% right now, but it is a remarkably sound MLP.
The distribution coverage ratio isn't the only metric to take into account when evaluating possible investment opportunities. It is important, though, and should be an integral part of any investment thesis when it comes to master limited partnerships.
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The article MLP Metrics That Matter: Distribution Coverage Ratio originally appeared on Fool.com.
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