Master limited partnerships (MLPs) are a favorite of income investors due to their high yields. Most MLPs are found in either the energy or industrial sector and secure their high distribution payments with stable demand for their products. Income investors may already know of the biggest, most popular MLPs such as Kinder Morgan Energy Partners, Enterprise Products Partners, and Linn Energy but sometimes great investment ideas come in small packages. This article highlights two small-cap MLPs with high, secure yields that are flying under Wall Street's radar.
OCI Resources (OCIR +0.00%) is a trona miner and soda ash producer that operates out of the Green River Basin of Wyoming. Soda ash is used to make baking soda, glass, paper, and various other chemicals and detergents.The company has a diverse customer base of over 75 companies including manufacturers and chemical producers.
The partnership's proven and probable reserves stand at 146 million short tons of soda ash, which is about 66 years' worth of production. The investment thesis for OCI can be summed up in four parts.
First, the partnership has strong competitive advantages over its rivals (FMC, Solvay, and Tata). Specifically, OCI's production costs are much lower because its competitors use synthetic production techniques to make soda ash; where OCI just mines trona, which is much cheaper to refine into the final product. This results in OCI's production costs being 33%-50% less than the competition's. In addition, OCI's safety record is far superior to its peers. In 2013 it recorded between 33%-117% fewer injuries (important for minimizing liability and regulatory risk).
The second reason for owning units of OCI is the 9.1% yield -- which is well covered by cash flows (fourth quarter 2013 distribution coverage ratio 1.32, 1.23 for full year). The incentive distribution rights to OCI's general partner max out at 48% of marginal distributable cash flow (DCF) above distributions of $0.575/unit/quarter. This gives management a major incentive to raise the distribution by 15% (yield of 10.5%).
The third part of the investment thesis is good growth prospects for soda ash. Between 2009-2012 international demand increased by 3% CAGR. Demand growth through 2022 is expected to be 3.4% CAGR (due to increased demand from developing countries). This growth in demand will help to keep soda ash prices high, and management is confident that it will be able to make accretive acquisitions in the future, further accelerating growth.
The final component of this partnership's investment thesis is valuation. Currently, OCI is trading at 5.26 times EV/EBITDA, nine times DCF, and just 0.5 times sales. Compare this to the industry average of 1.7 times sales and one can see substantial opportunity for multiple expansion and capital gains.
Hi-Crush Partners (HCLP +0.00%) is the largest provider of fracking sand in the Marcellus and Utica shale region, and one of the largest in the country overall.
The company mines its specialized sand from Wisconsin, with 3.2 million tons of annual capacity and a 30-year reserve. In 2014 it's expanding this capacity by 50% with a third facility in Whitehall, Wisconsin.
The investment thesis behind this partnership is two-fold.
First, it has exclusive rail access to the Marcellus shale and three times the distribution centers of its nearest competitor. The Marcellus shale is the largest and fastest growing gas field in America. With an estimated 410 Tcf (trillion cubic feet) of natural gas and 110 years of production life. Production growth from this shale formation has increased 14-fold (from 1 Bcf/d to 14 Bcf/d) in just seven years and is predicted to increase to as much as 20 Bcf/d by 2017-2018.
Demand growth for fracking sand is not only coming from the Marcellus but also from the Permian basin as well, where the partnership is opening a new distributional terminal and expects 20% CAGR growth through 2015.
For 2014 management is guiding for:
- 24%-46% increase in sand volume
- 16%-30.4% increase in EBITDA
- 10%-25% increase in DCF
- low double-digit-distribution growth
Small-cap MLPs represent both higher risk (due to smaller customer bases and less access to financial resources) and greater potential reward (because they are overlooked by Wall Street). Investors should take a look at OCI Resources and High-Crush Partners and see if these small-cap MLPs fit into their overall diversified income portfolio. Sometimes the best investment opportunities come in small packages, and I believe the growth catalysts behind these two partnerships might make them worth owning for long-term income generation and capital gains.
