In the last Energy Letter, I discussed the winners in the energy sector for the third quarter of 2016. Today I will focus more narrowly on the winners among master limited partnerships (MLPs).

As I did for the energy sector, I screened for Q3 total shareholder return (including distributions made during the quarter) using the proprietary stock screen I developed for The Energy Strategist. This screening tool is Excel-based, and extracts data from the subscription-only S&P Global Market Intelligence database.

I started with a list of current MLPs from the Master Limited Partnership Association (MLPA). In addition to the partnerships involved in the extraction, transport, and refining of fossil fuels, the MLPA encompasses MLPs in categories like real estate and asset management.

After eliminating those trading on the pink sheets I ended up with a list of 133 MLPs with enterprise values (EV) ranging from $100 million to $80 billion. The median Q3 total return among these was +6.2%, which was significantly better than the median Q3 return of the broader energy sector (+3.9%) or of the Alerian MLP Index (+1.7%).

Here are the third quarter’s top performers:

• EV – Enterprise value in millions of U.S. dollars, as of Oct. 14
• EBITDA – Earnings before interest, tax, depreciation and amortization, in millions for the trailing 12 months (TTM)
• FCF – Levered free cash flow, in millions
• Debt – Net debt at the end of the most recent fiscal quarter
• Q3 Ret – Total shareholder return, including dividends, in Q3 2016   

As with the broader energy sector, coal producers were at the top of the list. Foresight Energy (NYSE: FELP) was the top-performing MLP for the quarter with a gain of 143.6%.

The worst performers were a more diverse group, but unsurprisingly included oil and gas producers, fertilizer manufacturers, and refiners:

Notably, this bunch generated negative free cash flow on average over the past year, is still more expensive than the top performers based on EV/EBITDA despite the Q3 declines, and has higher relative debt.

The fourth quarter is likely to see some improvement in the fortunes of the oil and gas producers given the recent gains in oil and gas prices. Continue to tread carefully with the coal MLPs, however, as the long-term outlook for coal isn’t good.   

After skimming big coal-mining profits for subscribers last quarter, we’ve already moved on to the next great opportunity, one that exploits the broad strength we see across the MLP sector. Join us at The Energy Strategist for the one trade you need to make right now.

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