Last month, BP Prudhoe Bay Royalty Trust (BPT -2.82%) announced that it was paying a dividend of $1.38 per unit for the third quarter. With units of the royalty trust currently selling for about $26 apiece, that implies an annualized yield of more than 20%. While that payout likely has income-seeking investors salivating, they need to realize that it's not sustainable over the long term. That's because based on current reserve projections and oil prices, royalty payments from the Trust are projected to cease after 2019, according to its latest annual report.
Because of that, income investors should forget about BP Prudhoe Bay Royalty Trust. Instead, they should consider Crestwood Equity Partners (CEQP), Enterprise Products Partners (EPD 0.36%), and MPLX (MPLX -0.20%). Not only do all three of these energy companies offer above-average payouts, but they're likely to rise in the coming years, making them a better option for long-term income seekers than BP Prudhoe Bay.
A high yield with high-octane growth ahead
Crestwood Equity Partners currently yields 8.3%. What makes that payout attractive is that it's sustainable over the long term. That's because the company has secured long-term contracts to lock in more than 85% of its cash flow, which means Crestwood should generate steady cash for years to come. Meanwhile, the company only distributes about 80% of its cash flow to investors, which is a conservative level for a pipeline company. Those two metrics, when combined with Crestwood's improving balance sheet, suggest its payout is sustainable over the long term.
Not only can Crestwood maintain its current high-yielding payout, but the company has the potential to increase its distribution in the coming years. That's because it has several expansion projects under construction that position it to grow cash flow per unit at a 15% compound annual growth rate through 2020. Because of that, Crestwood's value should expand, while BP Prudhoe Bay's is winding down to zero.
Steady growth with more to come
BP Prudhoe Bay's distribution fluctuates with oil production and prices. Enterprise Products Partners' payout, on the other hand, has grown steadily for years. Overall, the midstream giant has increased its payout 66 times in the last two decades, including in each of the past 57 straight quarters.
That growth appears poised to continue. For starters, the company completed $4.4 billion of expansion projects last year and another $1.9 billion so far in 2018, which have fueled a 30% increase in cash flow over the past year. Meanwhile, it has $6 billion of additional projects under construction that should fuel strong growth in the coming years. Add that rising cash flow stream to the company's rock-solid financials, including one of the strongest balance sheets among MLPs and a healthy 1.6 times distribution coverage ratio, and Enterprise Products Partners' 6.5%-yielding distribution is on track for continued sustainable growth in the future.
Gears are shifting, but the results should remain the same
MPLX also offers an attractive payout -- currently yielding 7.7% -- that's on a firm foundation. Like both Crestwood and Enterprise, MPLX generates steady cash flow backed by free-based contracts and has a sound financial profile. Those factors have enabled the midstream company to increase its distribution in each of the last 23 quarters.
Another factor fueling its growth has been a steady diet of acquisitions from its parent Marathon Petroleum (MPC 1.07%). While Marathon sold its remaining midstream assets to MPLX earlier in the year, the company still has ample fuel to continue growing because it's evolving its business model to invest in large-scale pipeline projects. It already has one investment lined up and another in development. In addition to that, Marathon recently bought a rival refiner, which owned not only some midstream assets but also a stake in another MLP. Because of that, Marathon could sell those assets to MPLX in the future as well as merge its MLPs. That means MPLX has no shortage of growth opportunities ahead of it, which should give it the fuel to continue increasing its high-yielding distribution to investors.
Better long-term options for income seekers
BP Prudhoe Bay's 20% yielding dividend will soon disappear. Because of that, income investors should forget about that stock and consider those that can supply them with a sustainable income stream. While many companies fit that bill, three of the best in the energy sector are Crestwood Equity, Enterprise Products, and MPLX.