Yield-Starved Investors Have More Options Than Ever Before

In recent years, investors looking for higher yields in a low interest rate environment found that distribution payouts from master limited partnerships in the energy sector fit their needs quite nicely. Recently, the variety of MLPs hitting the market has offered these investors more choices than just the standard exploration and production or midstream MLPs. Today we're looking at what else is out there, and what investors need to remember when chasing yields.

The modern era
MLPs came to be in the 1980s, but the field has changed dramatically since then. Most refer to the year 2000 as the beginning of the modern era of MLPs. By that time, most of the old exploration and production MLPs that weren't hedging commodity prices had failed, and midstream MLPs took over as the largest represented energy subsector in the MLP universe.

The chart below categorizes every energy MLP initial public offering since the year 2000:

Source: Alerian and Midstream Business 

Midstream MLPs, represented by the dark blue on the graph, represent about 54% of all energy master limited partnerships and still account for the majority of MLP IPOs to date.

What's interesting is that over the last three years we've watched energy companies that have not attempted to find success with the MLP business structure all of a sudden give it a go. The "other" category first appeared in 2011, and since then we've watch frac sand producers, petrochemical companies, and offshore drillers throw their hats in the ring. We've also watched several refiners join the fray as well.

Are the options worth it?
Midstream MLPs are favored by investors because they are predictable businesses that generate predictable cash flows, and accordingly, predictable distributions to investors. Some of today's newer options, specifically refiners like CVR Refining (CVRR) and Northern Tier Energy (NYSE: NTI) utilize what is called a variable distribution. It means exactly what it sounds like, and these partnerships may increase, decrease, or not pay a distribution whenever business conditions dictate such a move.

The second-quarter distributions for these two partnerships are perfect examples of how quickly variable distributions can change:

Source: Yahoo! Finance

Variable distributions are not new, but they are more common now than they once were. In addition to the refiners, MLPs that produce nitrogen fertilizers like Rentech Nitrogen Partners (NYSE: RNF) and Terra Nitrogen (NYSE: TNH) also utilize variable rate distributions.

Rentech has paid six distributions so far; it increased it twice and decreased it three times. It has always paid a distribution, but the payout is certainly variable.

Terra Nitrogen's has been around much longer; its IPO was in 1992, and its distribution history can show us something else about variable rates:

TNH Dividend data by YCharts

Over the course of 10 years, Terra Nitrogen was able to increase its distribution more than 1,000%. If you believe in the underlying business and want to hold these companies for a long time, you may very well be rewarded. They might just keep you guessing from quarter to quarter.

Bottom line
Investors shouldn't let MLP variety distract them from their investment goals. If you want to buy an MLP, do your research and find one that addresses your needs, be it yield, growth, reliability, or otherwise.