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Message
A List of (Potentially) Good MLPs to Invest In
Posted on 4/18/16 at 1:27 pm
Posted on 4/18/16 at 1:27 pm
I've come up with a list of MLPs that seem to be good investments. Originally the list was going to be strictly for producing future research reports, but I figured y’all would appreciate the list 
. But before that, I will give the process of producing the list and the reasoning behind it. Also, it's a good idea to do further research before investing in any of these, and it is not advisable to hold MLPs in an IRA due to tax issues.
The Process:
I started with a list of all MLPs from HERE except for MLP-related securities, ETFs, ETNs, and mutual funds. This produced a list of ~120. Next, I checked to see if they were profitable and if the annual earnings per share exceeded annual dividends per share, which knocked the list down to 22; notably, this removed all upstream MLPs. After that, I removed any stock with a dividend yield under 3.5%, reducing the list to 15. Finally, I subjected the remaining 15 to the Piotroski F-Score.
Reasoning for the Process:
Obviously, we want as complete a list as possible to begin. Next, we should also want to be owners/partners in profitable businesses. Now, since MLPs pay out most of their profits as dividends, we also want those dividends to be sustainable (hence profits per share higher than dividends per share) and worthwhile (removing smaller yields since we will likely see most of our return through dividends). Finally, we want to be owners of financially sound companies, which is what the Piotroski F-Score is for (you can read about its 9 points and why they matter HERE; see HERE for a backtest that shows how effective using the score can be). The F-Score has 9 criteria, and every passing criteria earns a stock 1 point; we want stocks with scores of 7-9.
. But before that, I will give the process of producing the list and the reasoning behind it. Also, it's a good idea to do further research before investing in any of these, and it is not advisable to hold MLPs in an IRA due to tax issues. The Process:
I started with a list of all MLPs from HERE except for MLP-related securities, ETFs, ETNs, and mutual funds. This produced a list of ~120. Next, I checked to see if they were profitable and if the annual earnings per share exceeded annual dividends per share, which knocked the list down to 22; notably, this removed all upstream MLPs. After that, I removed any stock with a dividend yield under 3.5%, reducing the list to 15. Finally, I subjected the remaining 15 to the Piotroski F-Score.
Reasoning for the Process:
Obviously, we want as complete a list as possible to begin. Next, we should also want to be owners/partners in profitable businesses. Now, since MLPs pay out most of their profits as dividends, we also want those dividends to be sustainable (hence profits per share higher than dividends per share) and worthwhile (removing smaller yields since we will likely see most of our return through dividends). Finally, we want to be owners of financially sound companies, which is what the Piotroski F-Score is for (you can read about its 9 points and why they matter HERE; see HERE for a backtest that shows how effective using the score can be). The F-Score has 9 criteria, and every passing criteria earns a stock 1 point; we want stocks with scores of 7-9.
3
Posted on 4/18/16 at 1:27 pm to Omada
The List of 7-9's:
CNNX (8)- a midstream MLP formed between CONSOL Energy and Noble Energy for their Marcellus shale operations in Pennsylvania and West Virginia. The only F-Score criteria it failed was for a lower Long Term Debt to Total Assets Ratio; however, since long term debt is only 8% of assets, this company is essentially a 9. And since there is so little debt, there is obviously a lot of equity, which is good for shareholders. I would like to see a little higher current ratio, though. The only obvious issue is the MLP's ties to CONSOL and Noble; should they face trouble, so will CNNX.
CINR (8)- owns a controlling interest in a trona ore and soda ash miner in Wyoming. The current ratio has fallen since last year, so that is the only F-Score criteria it fails. However, the current ratio is still over 3, so this company should really be considered a 9 as well. The dividend has been slowly increasing. The only obvious issue I see is that they have only 1 main customer.
SGU (7)- a distributor and seller of propane and heating oil in the Northeast and Mid-Atlantic regions of the US. The F-Score criteria it fails are higher Asset Turnover and Current Ratios over the prior year; however, the current ratio is still over 1, and the asset turnover ratio is a good 2.4, so SGU is basically an 8. The dividend yield is lower than the previous two, but the stock price alone has outperformed the S&P on a 1 year and 10 year basis and matched the S&P on a 5 year basis.
The Maybe's:
WLKP (4)- an ethylene producer with 2 facilities in Lake Charles, LA and one in Calvert City, KY. It fails 5 criteria (current ratio, asset turnover, ROA, gross margin, LT Debt to Asset ratio), but the current ratio is still high and asset turnover, ROA, and gross margins are still good. The stock price has been declining since the IPO, though. WLKP could use further research.
NTI (5)- a variable distribution MLP, NTI is a refiner and retail gasoline seller in the Midwest (the PADD II region). It has a refinery in Minnesota and 165 SuperAmerica brand convenience stores in South Dakota, Minnesota, and Wisconsin. It fails 4 criteria (current ratio, LT Debt to Assets ratio, asset turnover, dilution). However, the current ratio is still good at 1.4, the increase in Long Term Debt relative to Total Assets was minor, asset turnover is still good at 2.93, and the dilution was minor. this doesn't seem like a bad MLP at a glance.
TNH (4)- a nitrogen fertilizer producer and another variable distribution MLP. TNH also fails 5 criteria (current ratio, LT Debt to Assets ratio, gross margins, ROA, and asset turnover). However, the company has a current ratio of 2.9 and very little debt (current assets could pay off all liabilities two times over easily), gross margins saw only a slight decline, and ROA and asset turnover are still strong. Sales declined a fair bit last year due to work on their sole facility, which reduced production. Not a bad looking MLP that deserves more research.
CNNX (8)- a midstream MLP formed between CONSOL Energy and Noble Energy for their Marcellus shale operations in Pennsylvania and West Virginia. The only F-Score criteria it failed was for a lower Long Term Debt to Total Assets Ratio; however, since long term debt is only 8% of assets, this company is essentially a 9. And since there is so little debt, there is obviously a lot of equity, which is good for shareholders. I would like to see a little higher current ratio, though. The only obvious issue is the MLP's ties to CONSOL and Noble; should they face trouble, so will CNNX.
CINR (8)- owns a controlling interest in a trona ore and soda ash miner in Wyoming. The current ratio has fallen since last year, so that is the only F-Score criteria it fails. However, the current ratio is still over 3, so this company should really be considered a 9 as well. The dividend has been slowly increasing. The only obvious issue I see is that they have only 1 main customer.
SGU (7)- a distributor and seller of propane and heating oil in the Northeast and Mid-Atlantic regions of the US. The F-Score criteria it fails are higher Asset Turnover and Current Ratios over the prior year; however, the current ratio is still over 1, and the asset turnover ratio is a good 2.4, so SGU is basically an 8. The dividend yield is lower than the previous two, but the stock price alone has outperformed the S&P on a 1 year and 10 year basis and matched the S&P on a 5 year basis.
The Maybe's:
WLKP (4)- an ethylene producer with 2 facilities in Lake Charles, LA and one in Calvert City, KY. It fails 5 criteria (current ratio, asset turnover, ROA, gross margin, LT Debt to Asset ratio), but the current ratio is still high and asset turnover, ROA, and gross margins are still good. The stock price has been declining since the IPO, though. WLKP could use further research.
NTI (5)- a variable distribution MLP, NTI is a refiner and retail gasoline seller in the Midwest (the PADD II region). It has a refinery in Minnesota and 165 SuperAmerica brand convenience stores in South Dakota, Minnesota, and Wisconsin. It fails 4 criteria (current ratio, LT Debt to Assets ratio, asset turnover, dilution). However, the current ratio is still good at 1.4, the increase in Long Term Debt relative to Total Assets was minor, asset turnover is still good at 2.93, and the dilution was minor. this doesn't seem like a bad MLP at a glance.
TNH (4)- a nitrogen fertilizer producer and another variable distribution MLP. TNH also fails 5 criteria (current ratio, LT Debt to Assets ratio, gross margins, ROA, and asset turnover). However, the company has a current ratio of 2.9 and very little debt (current assets could pay off all liabilities two times over easily), gross margins saw only a slight decline, and ROA and asset turnover are still strong. Sales declined a fair bit last year due to work on their sole facility, which reduced production. Not a bad looking MLP that deserves more research.
Posted on 4/18/16 at 1:29 pm to Omada
The Leftovers:
EQM (6)- midstream company in the Appalachian Basin. The dividend has been increasing
GEL (5)- midstream company for the Gulf of Mexico. The dividend has been increasing, but net income last year exceeded net operating cash flows, which isn’t good.
MMP (6)- transports and stores oil and refined products. Increasing dividend.
PBFX (6)- storage for oil and refined products. The dividend has been increasing, but the company has negative equity (debt exceeds assets).
SEP (5)- transports and stores NGLs and natural gas. The dividend has been increasing, but it has low liquidity.
SRLP (5)- stores and sells natural gas and other materials. The dividend has been increasing, but the company has quite a bit of debt.
GMLP- 2015 20-F (the full 2015 financial results) has not been released yet; owns and operates FSRU vessels for LNG.
SDLP- 2015 20-F has not been released yet; Seadril’s MLP that acquires and operates offshore drilling rigs; rigs are under long-term contract with Chevron, BP, ExxonMobil, and Tullow.
TGP- 2015 20-F has not been released yet; international LNG sea transportation service.
Of these, EQM, MMP, and PBFX deserve a closer look, which I failed to do. GEL was the MLP I was originally going to research, but I don't think that will happen now. Hopefully these lists are useful to everyone. 
EQM (6)- midstream company in the Appalachian Basin. The dividend has been increasing
GEL (5)- midstream company for the Gulf of Mexico. The dividend has been increasing, but net income last year exceeded net operating cash flows, which isn’t good.
MMP (6)- transports and stores oil and refined products. Increasing dividend.
PBFX (6)- storage for oil and refined products. The dividend has been increasing, but the company has negative equity (debt exceeds assets).
SEP (5)- transports and stores NGLs and natural gas. The dividend has been increasing, but it has low liquidity.
SRLP (5)- stores and sells natural gas and other materials. The dividend has been increasing, but the company has quite a bit of debt.
GMLP- 2015 20-F (the full 2015 financial results) has not been released yet; owns and operates FSRU vessels for LNG.
SDLP- 2015 20-F has not been released yet; Seadril’s MLP that acquires and operates offshore drilling rigs; rigs are under long-term contract with Chevron, BP, ExxonMobil, and Tullow.
TGP- 2015 20-F has not been released yet; international LNG sea transportation service.
Of these, EQM, MMP, and PBFX deserve a closer look, which I failed to do. GEL was the MLP I was originally going to research, but I don't think that will happen now. Hopefully these lists are useful to everyone.
Posted on 4/18/16 at 1:47 pm to Omada
Be very careful with energy sector MLP's right now.
One must really understand the financial position of the company. If the MLP restructures debt, the amount debt is reduced is considered noncash income for unit holders. The noncash income is a taxable event.
One must really understand the financial position of the company. If the MLP restructures debt, the amount debt is reduced is considered noncash income for unit holders. The noncash income is a taxable event.
Posted on 4/18/16 at 1:53 pm to Omada
quote:
Now, since MLPs pay out most of their profits as dividends
Most, if not all, of the companies listed in your post pay partnership distributions, not dividends, which may or may not be taxable to unit holders who will receive K-1's. I own SE (C-corp), APU, EPD, and MMP bought back in December primarily for financial strength, coverage ratios, and yield. Probably have limited upside at this time, but distributions were good at depressed prices.
Posted on 4/18/16 at 1:58 pm to LSU0358
quote:Correct, which is why the criteria I used is so important. The Piotroski F-Score looks to see if 1) the company is profitable, and 2) operating cash flows exceed net income. If operating cash flows do not exceed net income, that will point out accounting tricks like you mentioned. The only MLP I mentioned with operating cash flows less than net income was GEL, which is a leftover I wouldn't recommend over others.
One must really understand the financial position of the company. If the MLP restructures debt, the amount debt is reduced is considered noncash income for unit holders.
Good point, though.
This post was edited on 4/18/16 at 1:59 pm
Posted on 4/18/16 at 2:06 pm to tirebiter
quote:Also correct, sorry for the improper language. The distributions are typically taxable, even in IRA's if annual distributions exceed $1,000, I believe. And the downside of holding a bunch of MLPs is that your tax preparer may dislike you due to all of the K-1's!
Most, if not all, of the companies listed in your post pay partnership distributions, not dividends, which may or may not be taxable to unit holders who will receive K-1's.
Posted on 4/18/16 at 2:18 pm to Omada
I'm not going to speak to the financial aspects of MLP ownership as you are covering that.
However, there are important tax issues with owning these things.
As you mentioned, they are pretty bad for an IRA or any other tax-deferred vehicle.
Especially with the pipeline ones, generally they result in a deferral of tax. This is especially true of the pipeline MLPs, as they are constantly building new ones and putting money into existing ones and getting nice depreciation deductions. They throw off losses on K-1, but you are unable to take them currently.
However, when the music stops, they start showing income, and you can use the deferred losses to offset that income.
The real rub comes when you sell them. Generally a portion of your gain is ordinary gain, and a portion is qualified gain. Also, your basis is usually lower - sometimes much lower - then the historical cost shown on your broker statement. This is because the basis increases and decreases as income, loss, and distributions pass through during the years.
It's quite a shock when someone thinks they have a 4K capital gain from selling ones of these... and in reality they have a 17K gain, most of which is ordinary.
Also, these things add complexity to your tax return. This is especially true as some of these MLPs also own other MLPs. If you are doing your own taxes, it will be much harder. If you are paying someone to do our taxes, your fee will go up.
All of these things must be considered when deciding to invest in them. If it's a great financial investment, then you deal with the tax issues. But if it's only a so-so investment, the tax issues may exceed the investment benefits.
However, there are important tax issues with owning these things.
As you mentioned, they are pretty bad for an IRA or any other tax-deferred vehicle.
Especially with the pipeline ones, generally they result in a deferral of tax. This is especially true of the pipeline MLPs, as they are constantly building new ones and putting money into existing ones and getting nice depreciation deductions. They throw off losses on K-1, but you are unable to take them currently.
However, when the music stops, they start showing income, and you can use the deferred losses to offset that income.
The real rub comes when you sell them. Generally a portion of your gain is ordinary gain, and a portion is qualified gain. Also, your basis is usually lower - sometimes much lower - then the historical cost shown on your broker statement. This is because the basis increases and decreases as income, loss, and distributions pass through during the years.
It's quite a shock when someone thinks they have a 4K capital gain from selling ones of these... and in reality they have a 17K gain, most of which is ordinary.
Also, these things add complexity to your tax return. This is especially true as some of these MLPs also own other MLPs. If you are doing your own taxes, it will be much harder. If you are paying someone to do our taxes, your fee will go up.
All of these things must be considered when deciding to invest in them. If it's a great financial investment, then you deal with the tax issues. But if it's only a so-so investment, the tax issues may exceed the investment benefits.
Posted on 4/18/16 at 2:43 pm to LSUFanHouston
quote:
LSUFanHouston
That is the insight I was hoping someone would post! I'm a finance guy, not accounting and tax, so the tax implications are a bit beyond my scope here, and you said much more than I did/could have.
And if you aren't already familiar, may I suggest looking at the Piotroski F-Score and its creator, Joseph Piotroski? I think you may like it.
Posted on 4/18/16 at 3:04 pm to LSUFanHouston
quote:
It's quite a shock when someone thinks they have a 4K capital gain from selling ones of these... and in reality they have a 17K gain, most of which is ordinary.
Assuming that most of the ordinary gain is depreciation recapture, wouldn't you get to offset that with previously unapplied losses?
Posted on 4/18/16 at 3:55 pm to sneakytiger
quote:
Assuming that most of the ordinary gain is depreciation recapture, wouldn't you get to offset that with previously unapplied losses?
Yes, to some extent, this is true. It just depends on the timing of losses.
Posted on 4/18/16 at 5:45 pm to LSUFanHouston
quote:
It's quite a shock when someone thinks they have a 4K capital gain from selling ones of these... and in reality they have a 17K gain, most of which is ordinary.
About as much fun as selling rental property for a gain, then dealing with depreciation recapture and taxation, which is still more clear cut than potential MLP taxation.
Posted on 4/19/16 at 9:45 am to LSUFanHouston
I've been preparing tax returns for over 25 years. If asked I would not recommend retail investing in MLP/PTP. I have yet to see one perform equal to, or better than, the offering memorandum. My experience has been the only people who benefit from MLP/PTP are the organizers and promoters.
Posted on 4/19/16 at 10:23 am to Omada
just out of curiosity....where did MMLP fall in your list? I used to work for them so I have some company stock.
Posted on 4/19/16 at 10:44 am to TopWaterTiger
MMLP's latest distributions per share exceed the earnings per share, so it was one of the 100 that got cut by the first set of criteria.
While they currently have a good yield, I'm concerned they won't be able to sustain it or grow it without an increase in earnings. That doesn't mean the MLP is at risk of going belly up, it just means the distributions may be cut in the future. Of course, if there was a reason for lower earnings that will not persist, it could be okay after all. Such information could be found in the 10-K on the company's and SEC websites.
While they currently have a good yield, I'm concerned they won't be able to sustain it or grow it without an increase in earnings. That doesn't mean the MLP is at risk of going belly up, it just means the distributions may be cut in the future. Of course, if there was a reason for lower earnings that will not persist, it could be okay after all. Such information could be found in the 10-K on the company's and SEC websites.
Posted on 4/19/16 at 3:30 pm to Omada
I have a challenging one for you. SXE.
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