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Basic Materials

Break with Tradition for Big Profits

By Elliott H. Gue, on Jun. 3, 2014

Roughly 80 percent of master limited partnerships (MLP) own and operate midstream energy assets that transport, process and store oil, natural gas and natural gas liquids.

The predictable cash flow generated by these businesses fits well with the MLP model and enables these partnerships to offer high yields and deliver steady distribution growth.

For example, pipelines usually operate under long-term capacity-reservation agreements that require customers to pay a minimum fee regardless of the volume of oil and gas shipped.

In fact, most MLPs won’t start to build a new pipeline unless they’re able to secure long-term commitments from producers that guarantee a sufficient return on their investment.

MLP Mania

At this point, the investment community has a good understanding of the midstream energy business, with ample coverage from the major brokerage houses.

In the early stages of the shale oil and gas revolution, investors could book yields in excess of 7 percent on high-quality names such as Enterprise Products Partners LP (NYSE: EPD). And initial public offerings (IPO) in subsequent years provided a fruitful hunting ground for investors.

But last year’s class of newly minted publicly traded partnerships included a higher proportion of uninspiring names, while investors quickly bid up Phillips 66 Partners LP (NYSE: PSXP) and a few other hotly anticipated IPOs.  

Today, investors are hard-pressed to find high-yielding MLPs that aren’t value traps.

However, the proliferation of MLPs that operate nontraditional businesses gives investors an opportunity dig for value in a corner of the market that receives far less attention from Wall Street analysts. You have to be willing to do a bit more homework to understand these business models and their growth prospects.

Heading into the National Association of Publicly Traded Partnerships’ annual MLP investor conference, one of our goals was to focus on some of these nontraditional names for potential inclusion in the Wealth Builders Portfolio.

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