1 MLP Distribution to Rely on Forever
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. Today, we're illustrating that point with some of our favorite gathering and processing MLPs: Southcross Energy Partners , MarkWest Energy , Targa Resources Partners , and Access Midstream Partners .
Got it covered?
To get a sense of an MLP's ability to make its distributions every quarter, we want to take a look at its distribution coverage ratio, which is simply its distributable cash flow divided by the total amount of distributions it paid out. Let's take a look at the third-quarter data for our partnerships:
Access Midstream is in great shape here. Volumes were up on its systems in the Eagle Ford, Haynesville, and Marcellus, which drove its excellent numbers this quarter. Distributable cash flow increased more than $85 million year over year, allowing Access to boost its distribution 23% over the same period, with ample coverage. The partnership has no direct exposure to commodity prices, which makes this one of the more alluring gathering and processing MLPs on the market.
Targa Resources Partners also passes the test, which is a great sign considering it did not do so last quarter. Management expects more of the same going forward, acknowledging that a stable commodity price environment should allow the partnership to maintain 1.0 times coverage, and increase distributions 7% to 9% over this year's payout.
MarkWest Energy Partners was one of the biggest third-quarter surprises, as it met neither analyst nor management's expectations. Despite record volumes on its systems, the partnership posted lower-than-expected operating income, and a net-income loss of $20 million in the face of what management deems "short-term operational constraints." It's certainly not panic time here, but investors will want to keep a closer eye on MarkWest going forward.
Finally, we have Southcross Energy Partners. It's been a publicly traded entity for just over a year, and things have not gone as smoothly as management would have hoped. Southcross Energy's distribution remained flat this quarter, but the partnership only had enough cash to cover half of it. Southcross is growing -- processing and fractionation capacity are up significantly since last June -- and it has a nice position in the Eagle Ford shale; but we have yet to see it hit distributable cash flow.
The distribution coverage ratio is not the only metric that should be taken 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.
Build your wealth
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.
The article 1 MLP Distribution to Rely on Forever originally appeared on Fool.com.Fool contributor Aimee Duffy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.