Why This MLP Is Dead Money and 2 Better Alternatives

Boardwalk Pipeline Partners had to cut its distribution by 81% in February, resulting in a catastrophic price collapse. This explains why Boardwalk's turnaround story is unlikely to succeed and offers investors two superior MLP alternatives.

Jun 26, 2014 at 2:22PM

In February, Boardwalk Pipeline Partners slashed its distribution by 81% and the unit price collapsed by 55%. 

BWP Dividend Chart
BWP Dividend data by YCharts

The small recovery since has been based on the investment thesis of a turnaround which management explained was based on a two pronged strategy of debt reduction (debt/adjusted EBITDA over 4.5 results in S&P downgrading one's credit rating) and capital investment in several major projects. These projects included the Bluegrass Pipeline joint venture with Williams Companies, which would have transported 400,000 barrels/day of natural gas liquids from the Marcellus Shale to the Gulf Coast's booming petrochemical industry. 

Williams recently pulled out of the venture "primarily in response to an insufficient level of firm customer commitments."

While Boardwalk's management has stated the project is not dead, the fact is without Williams Companies' financial backing, the cash strapped Boardwalk will be unlikely to complete the project. The fact that none of Boardwalk's pipelines actually reaches the Marcellus shale means that the partnership would need to build several hundred miles of additional pipelines to make the project a reality. The extra cost would make the venture uneconomical, especially given management's new emphasis on low EBITDA multiple (how long a projects takes to pay for itself) projects. 

For example, Boardwalk's Ohio to Louisiana access project, which will cost $115 million and transport 625 million cubic feet/day of gas, will pay for itself in just 3.8 years. Unfortunately for Boardwalk, it has only four major projects currently under way and only one coming online by the end of 2015.  

This means the current distribution is unlikely to grow for several years. Analysts are expecting no distribution increase until 2017 -- at which point they expect the distribution to be raised to $1.1/year (a 6.4% yield at today's price) and remain unchanged until at least 2023. 

The rule of thumb for estimating long-term total returns is yield+distribution/dividend growth. When we compare Boardwalk Pipeline Partners to its midstream peers, we see it falls short. 

MLP Yield 10 year Projected Distribution Growth rate 10 year Projected Annual Total Returns
Boardwalk Pipeline Partners 2.30% *10.65% 4.40%
Martin Midstream Partners 7.65% 3.62% 10.67%
Extran Partners 7.48% 3.24% 10.74%
Crestwood Midstream Partners 7.46% 2.97% 11.02%
El Paso Pipeline Partners 7.40% 0.31% 7.71%
Kinder Morgan Energy Partners 6.90% 5.65% 12.55%

Source: mlpdata.com, S&P Capital IQ

This table compares Boardwalk to the highest yielding midstream MLPs. You can see that neither Boardwalk's current yield nor distribution growth rate (when adjusted for a single projected increase in 2017) is likely to serve investors well over the next decade.

MLP Yield 10 year Projected Distribution Growth rate 10 year Projected Annual Total Return
Boardwalk Pipeline Partners 2.30% *10.65% 4.40%
EQM Midstream 1.99% 19.55% 21.54%
Targa Resources 1.86% 21.11% 22.97%
Oiltanking Partners 2.10% 18.46% 20.56%
Sunoco Logistics Partners 3.02% 11.26% 14.28%
Tesoro Logistics 3.35% 19.78% 23.13%

Source: mlpdata.com, S&P Capital IQ

In this table I compare Boardwalk to the fastest-growing midstream MLPs and we see that several have not just higher yields, but are likely to exceed both Boardwalk and the broader market in terms of total returns.

Better alternatives leading to superior returns
Kinder Morgan Energy Partners (NYSE:KMP) and Tesoro Logistics (NYSE:TLLP) are superior to Boardwalk Pipeline Partners for two key reasons:

First, Boardwalk's pipelines are lacking access to key shale areas; most notably the Bakken, Woodford, Barnett, Marcellus, and Utica shales. 

Kinder Morgan services every major shale oil and gas region. Meanwhile Tesoro Logistics, though smaller, has a key presence in North Dakota's prolific Bakken formation. Tesoro is building out its High Plains gathering, storage, and transportation infrastructure in the Bakken -- an area in short supply of such infrastructure. By the end of 2015, Tesoro will increase its oil capacity to 100,000 bpd with 65,000 bpd already under long-term fee based contract.

Tesoro Logistics is at an advantage in that it owns two refineries in California (four total on the West Coast, as well as oil import terminals). Due to environmental regulations, no new refineries have been built in California since 1979, creating a substantial operational moat for Tesoro. 

The second fundamental reason for owning Kinder Morgan and Tesoro Logistics over Boardwalk Pipeline Partners is potential for future growth.

Tesoro Logistics is working on expanding its West Coast oil import capacity by 350,000 bpd by 2015. With the right of first refusal on drop downs from its general partner Tesoro Corporation  and management only pursing projects with internal rates of return of 15%-25%, Tesoro Logisitcs has managed to grow its adjusted EBITDA by 56% annually over the last three years and is expected to grow earnings by 23% annually over the next decade.

Kinder Morgan, meanwhile, has $16.4 billion in projects it's working on, including its $5.5 billion Transmountain pipeline to carry Canadian oil sands to export facilities on Canada's West Coast.

Kinder Morgan represents one of the most diversified MLPs in America, with heavy investments into enhanced oil recovery, CO2 transportation infrastructure, and even oil tankers. In fact, Kinder Morgan recently purchased five oil tankers (with four more being built) and just ordered its tenth capable of hauling 330,000 barrels of oil. 

Foolish takeaway
I believe an investment in Boardwalk Pipeline Partners to be an unnecessary risk considering its poor current yield, worse distribution growth prospects, and limited project pipeline. This is especially true given that MLP investors have such excellent alternatives as Kinder Morgan Energy Partners and Tesoro Logistics. With higher yields, stronger distribution growth, and large project backlogs (backed by superior management and stronger balance sheets) income investors in these MLPs are likely to experience long-term market beating total returns while Boardwalk's returns languish. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers