Rocket-Fueled Income Plays

While most midstream MLPs have avoided having to cut distributions over the past year, the majority either held the payouts steady or raised them modestly.

And then there were the three that managed to increase year-over-year distributions by at least 30%. Two of the three are longtime recommendations in the MLP Profits portfolios.

At the top of the list was Tallgrass Energy Partners (NYSE: TEP), with year-over-year distribution growth of 32.5%. TEP provides natural gas transportation and storage services in the Rocky Mountain and Midwest regions of the U.S.

Tallgrass Energy Partners’ assets include the Tallgrass Interstate Gas Transmission Pipeline serving Wyoming, Colorado, Kansas, Missouri and Nebraska with natural gas primarily coming from the Denver-Julesburg Basin and the Niobrara and Mississippi Lime shale formations; the Trailblazer Pipeline system, a 439-mile interstate pipeline that transports natural gas from southeastern Wyoming to interconnections in Nebraska; natural gas processing plants in Casper and Douglas, Wyoming; and a natural gas treating plant in West Frenchie Draw, Wyoming.

TEP has increased the distribution every quarter since its 2013 IPO. Its first full-quarter distribution following Q3 2013 was $0.2975 per unit, and it’s managed to grow that to $0.795 per unit just three years later. Units currently yield 6.7% on an annualized basis, and have a total return of nearly 16% year-to-date.

Shell Midstream Partners (NYSE: SHLX) debuted to very heavy demand in 2014. The unit price advanced very quickly (+45% on its first day of trading), and while we initially recommended it, the price quickly outran our Buy target.

Investors were pricing in the expectation of robust distribution growth powered by purchases of the sponsor’s midstream assets, and that has certainly been the case, with distributions rising 32.3% over the past year. Nevertheless, because SHLX units initially advanced so much faster than the distribution they’ve pulled back sharply, and have produced a loss of 33% year-to-date.

Shell Midstream Partners owns interests in refined products and crude oil pipelines. These include a 50% interest in Bengal Pipeline Company, which owns a refined products pipeline that connects four refineries in Louisiana to refined products storage; a 6% ownership interest in Colonial Pipeline Company, the largest refined products pipeline in the United States connecting the Gulf Coast to the East Coast; a 92.5% interest in Zydeco, a batched crude oil system connecting Houston to Louisiana; and a 36% interest in Poseidon Oil Pipeline Company.

SHLX hasn’t managed the same level of distribution growth over the past two years as Tallgrass, but the decline in price has made it far more appealing than we deemed the partnership a year ago. In fact, we recently updated our advice for SHLX. Units currently yield 3.8% and the future looks bright.

Antero Midstream Partners (NYSE: AM) was one of the last MLPs to go public in 2014 before low commodity prices froze the IPO market. But AM has excelled, growing year-over-year distributions by 30.2%, and chalking a YTD total return of 28%.

Antero Midstream Partners’ owns the gathering pipelines and compressor stations moving the natural gas extracted by its parent, Antero Resources (NYSE: AR). These assets are located in the liquids-rich southwestern core of the Marcellus Shale in northwest West Virginia and liquids-rich core of the Utica Shale in southern Ohio. Antero Resources is one of the most active drillers in the Appalachian Basin. Units currently yield 3.6%.

Another half dozen or so midstream MLPs have managed to grow distributions by at least 20% year-over-year. Join us at MLP Profits to add the best fast-growing income plays to your portfolio.   

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

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