Energy Transfer Equity (ETE +0.52%) is unique in the energy sector since it's not only one of the few remaining general partnerships, but it controls two master limited partnerships (MLPs): Energy Transfer Partners (ETP +0.00%) and Sunoco LP (SUN 1.05%). Those relationships are important to note because the company makes its money by collecting fees from those MLPs, which have grown burdensomely high in recent years. Because of that, many of its rivals have completed transactions to eliminate those payments, which in several cases have resulted in distribution cuts for investors.
Because it appears likely that Energy Transfer Equity will ultimately follow suit in eliminating those costly fees, income-focused investors are better off avoiding the company and its 6.6% yielding distribution for now. That's because several other pipeline companies offer payouts that are just as appealing and are on a more sustainable footing. Three of those better options are ONEOK (OKE +0.04%), MPLX (MPLX 0.37%), and Crestwood Equity Partners (CEQP +0.00%).
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Stronger together
This past February ONEOK announced that it had agreed to buy the remaining outstanding units of its MLP that it didn't already own in a $17.2 billion deal. That transaction would enable it to eliminate the costly incentive distribution rights (IDRs) that impacted the price it paid to access outside capital. With that burden lifted, ONEOK anticipated that it could grow its already generous dividend by 21% this year and at a 9% to 11% annual rate from 2018 to 2021.
The purchase closed at the end of June and is already paying off. ONEOK used its reduced capital costs to raise $1.2 billion in notes to refinance existing debt and pre-fund several growth projects. Further, it made good on its promised 21% dividend boost. As a result, the company now yields a healthy 5.3%, which is a well-supported level considering that the company's leverage ratio has improved from 5.1 times to 4.7 times and it sports a conservative 1.2 times coverage ratio. Meanwhile, with several expansion projects underway, ONEOK appears poised to deliver robust dividend growth over the coming years.
A high growth high yield
MPLX currently yields 6.4%, however, like ONEOK, that payout is on its way up. The company expects that its organic growth projects alone should support 12% to 15% distribution growth this year and a double-digit increase in 2018. Further, that payout is at a sustainable level because MPLX boasts 1.2 times distribution coverage and has a low 3.8 times leverage ratio.
In addition to that, the company is in the process of completing a series of strategic initiatives with its parent company Marathon Petroleum (MPC 0.40%). So far this year the two have finished two drop-down transactions totaling more than $3 billion in assets. Meanwhile, they expect to complete the remaining drop down of Marathon's assets by the early part of next year. Further, Marathon has agreed to exchange its IDRs for more units of MPLX, which will result in the elimination of that payout. Once Marathon completes these remaining transactions, it will reduce MPLX's cost of capital and increase the visibility of distribution growth.
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A dirt cheap high-yield stock
Crestwood Equity Partners is the highest yielder in this group at an eye-popping 9.9%. While a payout approaching double-digits is usually a sign of trouble, that's not the case at Crestwood. That's because the company boasts a conservative coverage ratio that should be between 1.2 to 1.4 times this year and a leverage ratio that should range from 4.0 to 4.5 times. Further, it eliminated its IDRs in 2015 by merging with its former MLP.
Instead, the primary factor causing the sky-high yield is Crestwood's ridiculously cheap valuation. The company currently sells for about eight times expected distributable cash flow for 2017. For comparison's sake, MPLX and ONEOK trade for 12.5 and 16 times distributable cash flow, respectively. One reason for Crestwood's current discount is that investors punished the company after it reduced its payout last year to improve coverage and generate excess cash so it could finance some of its growth projects. Those expansions, however, should start supplying incremental cash flow in 2018 and 2019, which positions the company to restart distribution growth. As that growth materializes, the valuation gap should begin shrinking.
Better options amid the uncertainty
ONEOK, MPLX, and Crestwood Equity Partners offer investors high current yields that each expects to grow in the coming years. One of the factors supporting that view is that each has already taken steps to eliminate the costly IDRs, which is the primary fuel for Energy Transfer Equity's payout. That greater visibility into future growth makes them far better choices for income-focused investors since these payouts appear sustainable while the future of Energy Transfer's payout isn't quite so clear.
