Bond King Bill Gross may be best known for his investing acumen when it comes to fixed-income securities, but the billionaire recently posted on X, formerly known as Twitter, that he loves master limited partnership (MLP) pipeline stocks. There were three high-yielding stocks in particular that he called out.
Let's take a look at the MLP stocks that Gross is a fan of and why they could be attractive investments.
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MPLX
There are a lot of things to like about MPLX (MPLX 0.30%), which is about 65% owned by refiner Marathon Petroleum (NYSE: MPC).
One of the most attractive attributes of MPLX is its current 7.7% yield and increasing distribution. MPLX raised its distribution by 10% in 2023 and is poised to raise it this year as well. The company also has a strong balance sheet with 3.3 times leverage and a distribution-coverage ratio of 1.6 times. Leverage for MPLX is its consolidated net debt divided by its twelve-month trailing adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Its coverage ratio, meanwhile, is its cash flow divided by its distribution payout. Midstream companies typically look to carry leverage between 3.0-4.0 times. A coverage ratio of over 1.0 times means that a company's distribution is currently covered by its cash flow.
MPLX's Logistics & Storage segment, which accounts for about two-thirds of its adjusted EBITDA, has attractive long-term, fee-based contracts with Marathon that generally include minimum-volume commitments. As such, the segment tends to be a steady performer with great visibility. Its gathering and processing segment is more tied to natural gas volumes coming out of Marcellus and Utica Shale, two of the lowest-cost natural gas basins in the U.S.
While the company has pulled back on growth projects in recent years to focus on its balance sheet, it still is set to spend about $950 million on several growth projects set to come online in 2024 and 2025.
Western Midstream
Western Midstream (WES 0.42%) is another MLP that is set to aggressively grow its distribution this year. The company, which is about 45% owned by Occidental Petroleum (NYSE: OXY), forecast that it would increase its base distribution by 52% this year to $3.20 or more per unit. The stock currently sports a 7% yield based on the distributions it paid out in 2023. Based on a $3.20 payout, its yield would jump to 8.9%.
Western Midstream ended 2023 with a solid 3.7 times leverage (defined as net debt divided by its twelve-month trailing adjusted EBITDA), while also announcing the divestiture of a number of non-core assets to help improve its balance sheet even further.
Western Midstream primarily services Occidental Petroleum's gathering and processing needs in the Delaware Permian, Powder River Basin (PRB), and the Denver-Julesburg (DJ) Basin. The Delaware is often considered one of the best basins in the U.S. Its low break-even prices have led to solid volume growth for the company. Western Midstream recently increased its presence in the Powder River Basin through its acquisition of Meritage Midstream Services last fall. Production in the DJ Basin has been flat for a few years, but it has recently started to see a turnaround.
The company is set for solid growth with increased Permian and PRB volumes, while it will spend about $500 million on expansion projects this year.
Energy Transfer
After cutting its distribution by 50% in 2020, Energy Transfer (NYSE: ET) has managed not only to get it back to pre-cut levels, but with its most recent distribution increase, the company is now paying out a quarterly distribution that is one cent higher than before it slashed its payout. That's good for a yield of 7.9% for the stock. With its distribution restored, the company is now looking to grow it by 3% to 5% a year moving forward.
Over the last few years, Energy Transfer has been able to nicely improve its balance sheet to get down to near 4 times leverage, and once it gets it to 4 times, it expects to begin to prioritize unit buybacks. Note that Energy Transfer's leverage refers to the leverage ratio that rating agency's use, which makes adjustments for recent acquisitions.
The company has a robust 1.9 times distribution-coverage ratio, so it has plenty of excess cash to return to unitholders once its leverage target is reached.
Similar to Western Midstream and MPLX, it also operates a largely fee-based business, which reduces its direct exposure to swings in commodity prices. For 2024, it expects about 90% of its earnings to come from fee-based activities. It has a very large diversified and integrated midstream system that tends to perform well throughout various commodity cycles.
The company has one of the best growth-project backlogs in the midstream space. It expects to spend about $2.5 billion in growth capex this year on a number of different expansion projects.
Three solid, high-yield options
MPLX, Western Midstream, and Energy Transfer all have attractive yields and are growing their distributions. They also have largely fee-based businesses that are not directly impacted by commodity prices.
MPLX Dividend Yield data by YCharts.
While Bill Gross is known as a bond investor, he apparently likes the cash that these pipeline MLPs are throwing off to investors with their distribution yields. All three stocks are solid options in the midstream space for income-oriented investors to consider adding to their portfolios.
