Bill Gross has made a lot of money investing in fixed income. He co-founded the investment management firm Pimco, where he became one of the top bond fund managers. Forbes states that Gross, known as the "Bond King," is worth about $1.7 billion.
While Bill Gross built his reputation, and net worth, on bonds, he's recently been pounding the table on a different income-focused investment: Master limited partnerships (MLPs). In a recent post on X, formerly Twitter, Gross cautioned against investing in tech stocks. Instead, he highlighted that MLP pipelines "still have momentum" and that he owned Western Midstream Partners (WES -1.16%) and MPLX (MPLX -0.83%). Here's a closer look at these top MLPs and whether investors should follow Gross' advice by investing in the sector.
Its strategy is paying big dividends
Gross has advocated for Western Midstream in the past. The MLP owns midstream assets in the Rocky Mountains, North-central Pennsylvania, Texas, and New Mexico. Its primary focus is on gathering and processing (G&P) operations. Its services include:
- Natural gas: Gathering, compressing, treating, processing, and transporting.
- Liquids (condensate, natural gas liquids (NGLs), and crude oil): Gathering, stabilizing, and transporting.
- Produced water: Gathering and disposal.
Western Midstream earns fees secured by long-term contracts by providing those services to oil and gas producers (led by its parent and top investor, Occidental Petroleum). While those fee-based contracts mute its direct exposure to commodity prices, its business has some volume sensitivity (if prices decline, producing customers won't drill as many new wells, impacting volumes flowing through its midstream assets).
The MLP generates fairly predictable earnings, giving it solid visibility into its cash flow, growth capital spending, and cash distributions to investors:
Image source: Western Midstream Partners.
Western Midstream recently sold several non-core assets for $790 million. That gave it the cash to reduce its leverage ratio and outstanding units meaningfully. As a result, the MLP expects to be able to pay at least $3.20 per unit in distributions this year (with upside to $3.50 per unit). That's up to a 52% increase and puts its distribution yield up near 10%.
The company's strong free cash flow and balance sheet enable it to invest in growing its operations and earnings. It expects capital spending to be between $700 million and $850 million this year. Meanwhile, the company has the flexibility to opportunistically make acquisitions (it bought Meritage Midstream Services in an $885 million deal last year). These investments should grow its cash flow, giving it more fuel to increase its distribution.
Lots of fuel to grow its distribution
MPLX is an MLP formed by refining giant Marathon Petroleum. Its initial focus was on building and buying logistics and storage assets (e.g., oil and refined product pipelines and terminals) to support its refining parent. However, MLPX has since diversified into owning long-haul natural gas and NGL pipelines, NGL fractionation complexes, and G&P assets. Its logistics and storage assets tend to generate very stable cash flow backed by take-or-pay and regulated rate structures, muting the impact of volume fluctuations and commodity prices.
The company uses its stable cash flow to pay distributions to investors (it currently yields 8.1%), invest in expansion projects, and maintain financial flexibility. The MLP expects to fund about $950 million of growth projects in 2024. Meanwhile, it will opportunistically make acquisitions. In fact, it bought out a partner's interest in a G&P joint venture (JV) last year for $270 million. MPLX also recently enhanced another JV by adding another partner that brought in a new growth project.
MPLX's growth-related investments have given it the fuel to increase its distribution by 10% in each of the past two years. With more growth coming down the pipeline, it should be able to continue pushing its payout higher.
Should you follow Bill Gross into these MLPs?
One of the things Bill Gross loves about MLPs is that they pay high-yielding distributions that are largely tax-deferred. As pass-through entities, MLPs pass income, losses, deductions, and credits through to their investors. That eliminates double taxation. meaning taxes at the corporate level and dividend taxes. And that makes MLPs potentially great for those seeking tax-advantaged passive income.
However, MLPs have their drawbacks. They send investors a Schedule K-1 instead of a 1099-DIV. K-1s often arrive a few months later than 1099s. Those K-1s can complicate your taxes, so you might need to hire someone to do your taxes. On top of that, the energy sector can be volatile, which could affect MLP distributions if there's a major downturn -- though MPLX and Western Midstream back their payouts with rock-solid financials. Those potential issues aside, MLPs like Western Midstream and MPLX are ideal options if you desire a lucrative and growing passive income stream.
