High-yielding master limited partnerships (MLPs) performed terribly in 2017, with the average one in the Alerian MLP ETF (AMLP +0.33%) falling 14%. The fate of some MLPs was even worse, with several getting crushed this year. Among the worst performers were Plains All American Pipeline (PAA 0.09%), NuStar Energy (NS +0.00%), and Enbridge Energy Partners (EEP +0.00%), which each cratered more than 35% in 2017. That said, the drubbing over the past year has two of those MLPs currently trading at fantastic prices, which is why investors might want to consider scooping them up in hopes of catching a bounce back in 2018.
Ripping the Band-Aid off to get better quicker
Oil pipeline company Plains All American Pipeline lost more than 35% of its value in 2017. Sparking the slide was the company's first-quarter results, when it noted that its supply and logistics business had underperformed expectations due to challenging market conditions. Unfortunately, they only grew worse, which caused the company to cut its guidance in the second quarter, prompting its unit price to sell off. Worse yet, the company warned that it might need to reduce the distribution again. That decrease came a few months later when the company slashed its payout by more than 45%, which would save it $725 million in cash flow each year, giving it the money to quickly reduce debt to a much more comfortable level, as well as help finance expansion projects.
Image source: Getty Images.
That said, while 2017 has been a rough year for Plains, it's still on pace to generate $1.33 billion in distributable cash flow, which is only about 6% less than last year. Meanwhile, the company has several expansion projects under way, which should drive earnings up nearly 30% in the coming years and could enable the company to restart distribution growth in early 2019.
Paying the price for a pricy acquisition
Pipeline and terminal operator NuStar Energy plunged nearly 40% this year. One of the culprits was the company's acquisition of Navigator Energy Services for $1.475 billion. While NuStar expects the deal to fuel significant cash flow growth in the coming years, it paid a lofty price of more than 20 times 2017 EBITDA. For comparison sake, most midstream acquisitions fetch 12 to 15 times EBITDA multiples.
Because NuStar paid so much to acquire Navigator, the deal has weighed on the company's financial metrics. Distribution coverage, for example, fell from a tight 1.06 times in the first quarter to a dangerously low 0.66 times in the third quarter. Because of that, the company's focus in the near-term is to return coverage back above 1.0 times and also reduce its leverage ratio. While the company believes it can reach both goals by completing its organic growth projects, investors remain worried that it might need to cut its generous payout to accelerate this process.
Image source: Getty Images.
Repositioned and ready to grow
Enbridge Energy Partners took the biggest tumble of this trio, losing more than 45% of its value in 2017. That plunge started in February after the company announced an update to its strategic review, which caused investors to worry that the company would end up cutting its generous distribution. That reduction came a few months later, when it announced a 58% decrease in the payout, which was one of several strategic decisions designed to stabilize the company's financial situation so that it could grow in the coming years.
That plan has started to work. In November, Enbridge Energy Partners announced that it would generate between $775 million to $825 million in distributable cash flow next year, which would cover its 10.1%-yielding payout by a very comfortable 1.2 times. Furthermore, the company expects that it can grow cash distributions to investors by 3% per year through 2020, even as it works to reduce its leverage ratio down to its target level.
Too cheap to ignore
While both Plains All American Pipeline and Enbridge Energy Partners made moves to strengthen their financial situation this year, they got crushed in the process. However, because of that, they are now fantastic bargains. Enbridge Energy Partners, for example, currently trades for just 8.8 times cash flow, while Plains sells for 11.3 times, both of which are well below the mid-teens multiple of most MLPs. Those bargain basement prices, when combined with the fact that both companies have taken steps to become safer investments, could enable them to bounce back sharply in 2018.
