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Master Limited Partnerships

Selectively Buying the Dip in Energy MLPs

By Elliott H. Gue, on Feb. 27, 2015

But with more than 30 MLPs offering yields of more than 8 percent after the recent bust-up, income-seeking investors may be tempted to buy the dip.

Tread carefully. We recently put together a report for Energy & Income Advisor subscribers that highlighted several high-yielding MLPs that could be hazardous to your wealth.

For aggressive investors, two high-yield names stand out as being of interest.

Capital Product Partners LP (NSDQ: CPLP)

Marine-transport specialist Capital Product Partners LP generated enough cash flow to cover its fourth-quarter distribution by 1.2 times.

Capital Product Partners has weathered challenging supply and demand conditions in the tanker market, thanks to the support of its sponsor and general partner, Capital Maritime, which has dropped down assets and engaged the firm’s vessels at above-market rates.

The day-rates earned by product tankers in the spot market improved markedly in the fourth quarter, reflecting elevated refinery utilization rates and strong demand for diesel after crude-oil prices plummeted.

Suezmax tankers benefited even more the upsurge in volumes of crude oil shipped from Africa to Asia.

Capital Products Partners took advantage of these improvements to line up new fixtures for six of its vessels:

  • M/T Axios and M/T Assos inked three-year contracts with Petrobras (Sao Paulo: PETR4, NYSE: PBR) at a day-rate of $15,400;
  • M/T Akeraios and the M/T Apostolos extended their fixtures with Capital Maritime for another two years at a day-rate of $15,600;
  • M/T Aias secured a three-year time charter with Repsol (Madrid: REP, OTC: REPYY) for $26,500 per day; and
  • MT Arionas will operate under a 14-month contract with Capital Maritime at a gross rate of $14,250 per day.

These new fixtures extend the weighted average duration of Capital Product Partners’ remaining contracts to 7.9 years. And about 15 percent of the shipowners’ capacity will become available this year, providing some upside exposure to day-rates.

During the MLP’s fourth-quarter earnings call, management reiterated that planned drop-down transactions for this year should enable the partnership to hike its distribution—a potential upside catalyst for a name that last increased its payout in fall 2010.

Capital Products Partners will announce its distribution plans with its first-quarter results.

With term loans of $49 million and $180 million due over the next two years, the MLP faces some refinancing risk.

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