Master limited partnerships have been luring investors with their high yields and reliable distributions for years now. Sometimes, however, we get caught up in the yield and forget how important a reliable distribution really is. Today we're illustrating that point with NuStar Energy (NS 0.79%). This midstream MLP focuses on petroleum products transportation and currently sports a 10% yield.
Got it covered?
To get a sense of an MLPs ability to make its distributions every quarter, we want to take a look at its distribution coverage ratio, which is simply its distributable cash flow divided by the total amount of distributions it paid out.
The numbers we're evaluating today come from the second-quarter earnings releases for all of the partnerships listed below.
|
Company |
Distributable Cash Flow |
Distributions Paid |
Coverage Ratio |
|---|---|---|---|
|
Enbridge Energy Partners (EEP) |
$146.10 |
$206.80 |
0.71 |
|
NuStar Energy |
$55.10 |
$98.10 |
0.56 |
|
Magellan Midstream Partners (MMP) |
$168.20 |
$120.71 |
1.39 |
|
Tesoro Logistics (ANDX) |
$24.90 |
$26.10 |
0.95 |
|
Delek Logistics Partners (DKL 0.85%) |
$12.80 |
$9.70 |
1.32 |
Source: Company releases.
A distribution coverage ratio of 0.56 times payouts means that NuStar can only cover half of its distributions with the cash it generated in the second quarter. That is not what investors want to see at all. Similarly, Enbridge Energy Partners is not making the grade here.
Neither one of these partnerships increased their distributions in the second quarter, and in fact, NuStar hasn't increased its payout since the first quarter of 2011. So it sports a high yield, but it is not growing its distribution, obviously, because it cannot support what it is currently paying out.
Tesoro Logistics is an interesting case, because it too failed to make the grade, albeit just barely, but still increased its distribution by 4% sequentially, and 24% year over year.
This raises an important point, which is that these are quarterly numbers and may manifest the cyclical nature of the partnership's revenue or one-time tax charges that impact distributable cash flow one quarter, but not the next.
Ultimately, investors may feel more comfortable selecting an MLP like Magellan Midstream or Delek Logistics that have no problem generating enough cash to cover distributions every quarter. Both partnerships increased distributions for the second quarter. Magellan's popped 13% over 2012's number, while Delek increased its payout 2.6% over the distribution it made in the first quarter of this year.
Bottom line
The distribution coverage ratio is not the only metric that should be taken into account when evaluating possible investment opportunities. It is important, though, and should be an integral part of any investment thesis when it comes to MLPs.
