Inside the Alerian MLP Index: Natural Gas Transportation

It seems every other day there's a new master limited partnership hitting the market. In fact, the energy MLP space has gotten to be downright cluttered. In this three-article series, I'm taking a closer look at the Alerian MLP Index ETF  (NYSEMKT: AMLP  ) , a tool that gives investors the opportunity to simplify MLP investing. Today we're looking at the natural gas transportation MLPs that make up the fund. 

Nat gas!
The Alerian MLP Index ETF is up close to 12% year to date, driven by the performance of the 25 MLPs that make up the index. At the end of the second quarter, approximately 32.3% of the index was composed of energy players whose main business comes from natural gas transportation.

Source: Alerian.

Given the diversification of some of these partnerships, there are other components in the mix, but by and large, revenue is driven by natural gas. Of the 25 partnerships that make up the fund, nine of them were classified as natural gas when I checked the holdings this week (the holdings and weight of each holding can fluctuate daily).

Here's a breakdown of the nine natural gas partnerships and their respective weight in the fund as of Aug. 2:

MLP

Weight

Enterprise Products Partners (NYSE: EPD  )

9.65%

Kinder Morgan Energy Partners (NYSE: KMP  )

9.07%

Energy Transfer Partners (NYSE: ETP  )

6.88%

ONEOK Partners 

4.69%

Williams Partners 

4.13%

El Paso Pipeline Partners 

3.72%

Boardwalk Pipeline Partners (NYSE: BWP  )

2.63%

TC Pipelines

1.62%

Spectra Energy Partners

1.44%

Source: Alerian. 

Enterprise Products Partners and Kinder Morgan Energy Partners hold the top two spots here, and the top two spots in the fund overall. They are by and large considered the biggest and most stable MLPs on the market.

Enterprise is the MLP with the longest consecutive streak of quarterly distribution increases, at 36. The partnership recently reported second-quarter earnings, and four out of its five business segments were up on an annual basis. Perhaps most importantly, Enterprise posted a distribution coverage ratio of 1.4 times payouts, making it a safe bet for the Alerian ETF and individual investors alike.

Kinder Morgan also posted good second-quarter earnings, and investors were able to see just how important the diversity of this midstream giant is to its success. Exposure to commodity prices hurt the partnership's CO2 segment, but growth in natural gas pipelines more than made up for it. Kinder Morgan increased its distribution and is on track to hit its target of an annualized payout of $5.33 per unit.

The fund includes some up-and-coming MLPs as well, like Energy Transfer Partners and Boardwalk Pipeline Partners. Energy Transfer is on the radar of many investors anticipating a distribution increase for the first time in almost five years. The stock is up 20% this year as management seeks to repair fundamentals. It has already moved forward on a reorganization with its general partner Energy Transfer Equity aimed at simplifying its business structure and increasing transparency.

Boardwalk Pipeline Partners has also kept its distribution flat, though for not nearly as long as ETP. It's up more than 37% this year, as management strikes opportune joint ventures and distributable cash flow climbs. The partnership is suffering from shrinking revenues from contract renewals but has a couple of big projects on the horizon to drive growth.

Bottom line
The Alerian MLP Index ETF performs well and generates income without the paperwork headaches that come with individual MLP ownership via the K-1 form. As MLPs continue to flood the market, going with an index fund can decrease the likelihood of selecting a dud.

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