If it were possible to flip a light switch and change over to clean energy, the world would have done it by now. But no matter how much better it would be to avoid the use of carbon fuels, we still need them. And we will continue to need them for years to come, because energy transitions take time. That's why you might want to consider ultra high yielders Magellan Midstream Partners (MMP) and MPLX LP (MPLX 0.55%). Here's a quick look at each.
1. A long string of distribution growth
Midstream master limited partnership (MLP) Magellan Midstream has increased its distribution every year since its initial public offering (IPO) in 2001. That's an impressive two-decade-long streak. And the distribution yield is currently a heady 7.9%. To put that into perspective, the S&P 500 index yields just 1.3%, and the average energy stock, using Vanguard Energy Index ETF as a proxy, has a dividend yield of 2.6%. The relatively high yield should hint that there are some risks here. But how much risk is there?
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Magellan operates a collection of midstream assets focused around oil and refined products like gasoline and jet fuel. Essentially, it gets paid fees to move these energy sources through its pipelines, storage, and processing assets. As long as there is demand for these fuels, demand for Magellan's portfolio of hard-to-replace assets should remain strong. That won't change overnight.
But there are trade-offs. For example, Magellan is looking to cover its distribution by roughly 1.2 times. Historically that was considered robust, but in today's world, it is viewed as a bit low. However, Magellan has long focused on maintaining a rock-solid balance sheet, with a ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) that sits near the low end of its peer group.
That financial backstop has given the MLP the ability to muddle through tough times without the need to cut its distribution. Given that management upped its full-year 2022 outlook after it reported first-quarter results, now could be a good time for a deep dive.
2. A focus on growth
MPLX LP's business is more diversified, with midstream assets focused on oil and natural gas. It describes itself as a "growth focused" MLP, and was founded by Marathon Petroleum (MPC -3.67%) in 2012. So it doesn't have quite the same history as Magellan, but its dividend has been increased or held steady every year since its IPO.
Notably, the dividend wasn't increased in 2020 while the pandemic was upending the broader energy sector, but a large special dividend was paid in 2021, arguably making up for it.
The 8.5% distribution yield from MPLX, meanwhile, is even more generous than Magellan's yield. And that distribution was covered by cash flows by a strong 1.6 times in the first quarter. What's interesting here, though, is that there doesn't appear to be a huge trade-off going on, because the partnership's debt-to-EBITDA ratio of around 3.7 times is actually just a slight bit lower than Magellan's 3.8 times.
So what's the catch? Oil and gas producer Marathon Petroleum owns more than 60% of the units, and basically runs the partnership. This is good in that it has a sponsor with a vested interest in the partnership doing well. But it is bad in that the partnership could make decisions that benefit Marathon Petroleum over other MLPX unitholders.
While that's a clear possibility, it probably wouldn't make sense for Marathon since it would also be doing itself a disservice if it hurt MPLX, which handles a huge portion of the company's midstream needs. While such a dependent relationship needs to be kept in mind, this one appears pretty symbiotic and worth a closer look if you are seeking an ultra high-yield energy name.
Risk and reward
You don't get fat yields on Wall Street without taking on some risk, and both Magellan and MPLX have their downsides. But if you take the time to get to know them, you might find that the risk/reward balance favors taking a position. With the energy transition likely to last decades, there's no reason to think these two high-yield names will falter anytime soon.
