Income investors tend to be fond of midstream MLPs because of their high-yields and consistent distribution growth, made possible by long-term, predictable cash flows that come with running gas and oil pipelines. One downside to these kinds of investments are that 87% of pipeline partnerships have general partners, which comes with incentive distribution rights that can greatly slow distribution growth to limited partners (investors).
However, there are five midstream MLPs without general partners, and that are free to distribute 100% of marginal distributable cash flow (DCF) in the form of much faster growing distributions. At least that is how it's supposed to work. This article will point out one general partner-free partnership, Buckeye Partners (BPL), which I have written about in the past, and recommended against owning in lieu of much better alternatives. This article is designed to reassess that view and compare Buckeye Partners to two of my favorite (and fastest growing) general partner-free MLPs, Genesis Energy (GEL 0.26%) and MarkWest Energy Partners (NYSE: MWE).
What's wrong with Buckeye Partners?
In my previous article, my case against Buckeye partners was three-fold. First, I was concerned over the partnership's lack of exposure to major shale gas/oil formations in Texas, North Dakota, or along the Gulf Coast (although it does have exposure to the Marcellus/Utica shale, which is the fastest growing in the country).
Second, and more importantly, I was troubled by the partnership's low operating efficiencies and margins -- especially compared to competitors such as Kinder Morgan and Magellan Midstream partners.
Finally, I was concerned over management's ability to execute on the MLP's bread and butter growth strategy, accretive acquisitions. Buckeye had recently announced another writedown from its 2007 failed acquisition of Lodi Gas storage, and after management greatly overpaid for its general partner buyout in 2010 (26 times EBITDA) I was skeptical of how its latest acquisitions (oil storage terminals from Hess) would fare.
Well the latest earnings call indicated that management is starting to address some of my concerns. Specifically, the terminal acquisition is going well, resulting in net income this quarter up 7% (year over year) and adjusted EBITDA up 17.7%. Distributable cash flow was up 4.9% and the distribution coverage ratio was 1.03 (though 12-month coverage ratio is still .97).
However, operational efficiencies and margins have actually declined since last quarter and still stack up negatively compared to other general partner-free MLPs.
| MLP | ROA | ROE | Operating Margin | Net Margin |
| GEL | 3.6 | 9.4 | 2.8 | 2.3 |
| MMP | 14.9 | 43.6 | 40.2 | 34.2 |
| MWE | 0.8 | 1.9 | 14.1 | 3.7 |
| BPL | 2.4 | 5.6 | 8.7 | 2.8 |
| EPD | 6.7 | 18 | 7.2 | 5.4 |
| IND AVG | 2.4 | 8.5 | 8.3 | 3.4 |
Source: Morningstar.com
Why MarkWest and Genesis are so much better
At the end of the day, the primary reason for investing in general-partner free MLPs is superior distribution growth. Whether it's the 10-year distribution growth rate, the projected 10-year distribution growth rate (courtesy of S&P Capital IQ analysts),or the ever-important distribution coverage ratio, Buckeye Partners falls short of its peers.
| MLP | Yield | Distribution Growth Rate (10 yr) | 10 Year Projected Distribution Growth | 12 month Distribution Coverage Ratio |
| GEL | 3.90% | 13.75% | 14.82% | 1.08 |
| MMP | 3% | 10.55% | 13.62% | 1.62 |
| MWE | 5.60% | 10.64% | 41.25% | 1.02 |
| BPL | 5.60% | 5.27% | 7.31% | 0.97 |
| EPD | 3.80% | 6.42% | 8.10% | 1.57 |
Sources: Fastgraphs, MLPdata.com, Yahoo! Finance
I'd like to call attention to Genesis Energy and MarkWest Energy Partners, the two general partner-free MLPs with the highest projected distribution growth rates of the next decade. I'll briefly explain why these partnerships are poised to deliver on those high projections and why these two partnerships make better alternatives to Buckeye Partners (because investing is never done in a vacuum).
MarkWest Energy Partners is the best MLP for playing the Marcellus shale formation (America's fastest growing and most prolific gas formation with a 14-fold production increase in just seven years and expected to double again by 2035).
Into this hyper-growth steps MarkWest, with its 2.2 Bcf/d (billion cubic feet/day) of gas processing capacity (22% of 2013 Marcellus production) and plans to increase that by an additional 86%. Management is guiding for DCF growth of 30+% in 2014 with distribution growth of 7% in 2015 and 10% in 2016 with analysts expecting continued distribution growth acceleration afterwards.
Genesis Energy is a one-stop shop for the oil and gas boom along the Gulf Coast. The partnership provides pipelines for CO2 (for enhanced oil recovery), crude oil , refining services and final transportation logistical support by truck, barge, and ship. However, what makes Genesis special (and what has allowed the MLP to boast 35 consecutive quarters of distribution growth, 30 of those being growth of 10% or more, year over year) is its 1,050 miles of offshore pipelines, which service the offshore oil rigs in the Gulf of Mexico.
With an estimated 29 billion barrels of recoverable oil left in the Gulf and oil majors such a Chevron investing billions of dollars to extract it, this is one highly profitable niche that Genesis Energy (and its long-term investors) will be pumping for decades to come (fueling both strong distribution growth and capital gains in the process).
Foolish bottom line
Let me be clear, Buckeye Partners is not a bad MLP. Its yield is generous and its 7% distribution growth means that its investors will likely beat the market in the long-term. However, the partnership is struggling with mediocrity when it comes to profitability, operational efficiency, and relative future growth prospects compared to peers such as MarkWest and Genesis Energy. Given limited time and discretionary funds to invest, why settle for "ok" when you can have "great"? Why eat hamburger when steak is available for the same price?
