In last week’s issue of MLP Investing Insider, I answered the majority of the remaining MLP questions from the monthly joint web chat for subscribers of The Energy Strategist and MLP Profits. Today I answer the final two questions, which actually encompass seven different MLPs.

Q: Could you please opine on NSLP, TEP, KNOP, and SUSP?

These are four very different partnerships, except for the fact that all went public relatively recently.

New Source Energy Partners (NYSE: NSLP) debuted in February 2013 as the year’s first initial public offering of an upstream master limited partnership, with an initial enterprise value (EV) of $186 million. The partnership is engaged in the development and production of liquids-rich conventional resource reservoirs in east-central Oklahoma.

At the end of Q2 2013, NSLP had ~ 17.2 million barrels of oil equivalent (BOE) total proved reserves, of which 61 percent were developed and 71 percent were liquids. 3Q 2013 production was 3,927 BOE/day. At present the EV is $340 MM, and the annualized yield based on the distributions during the second half of last year is 9.4 percent. The partnership has a total debt/equity ratio of 87.7 percent  for the most recent quarter.

Tallgrass Energy Partners (NYSE: TEP) is a midstream limited partnership that provides natural gas transportation and storage services in the Rocky Mountain and Midwest regions of the US. The partnership launched on May 13, 2013 and in late June increased EBITDA guidance above analysts’ expectations, causing units to climb nearly 21 percent by year-end. In December TEP reiterated guidance for 1.2x distribution coverage for the entire year. The partnership recently declared a distribution of $0.3150 per unit for the fourth quarter of 2013 – a 5.9 percent increase from the Q3 2013 distribution. TEP’s annualized yield based on the most recent distribution is 4.8 percent, its current EV is $1.28 billion and its total debt/equity (mrq) is 30.5 percent.

KNOT Offshore Partners (NYSE: KNOP) is organized and headquartered outside the US. Although organized as a partnership, it has elected to be taxed as a corporation in the US and furnishes 1099s rather than K-1s.

KNOP owns and operates shuttle tankers under charters of five years or more. A shuttle tanker is a specialized ship designed to be an alternative to pipelines in some situations. The tanker transports crude oil and condensates from offshore oil fields to onshore terminals and refineries. KNOP launched in April 2013, and units closed the year with a 29 percent gain. KNOP’s quarterly cash distribution has been $0.435 per unit for the past two quarters. At the most recent closing price, this equates to a 6.7 percent annual yield. KNOP’s current EV is $786 million and its total debt/equity (mrq) is 127 percent.

Susser Petroleum Partners (NYSE: SUSP) debuted in September 2012, and has appreciated by 50 percent since. Susser engages in fee-based wholesale distribution of motor fuels. The partnership also distributes petroleum products like propane and lube oil, and receives rental income from real estate.

The most recent quarterly distribution was $0.4687 per unit, or $1.87 on an annualized basis. At the recent closing price, that corresponds to an annual yield of 5.5 percent. SUSP’s current EV is $910 million and its total debt/equity (mrq) is 231 percent.

Of the four, I would avoid SUSP and KNOP because of their high levels of debt. I think TEP is — as you might expect from a midstream MLP — the safest option of the four. NSLP is about two-thirds hedged on oil and gas prices, but it still has a lot more commodity exposure as an upstream MLP. If I had to choose one of the four, and I was choosing for income and capital preservation, I would probably pick TEP.

Q: What are your views on ACMP, RRMS and TLLP?

Access Midstream Partners (NYSE: ACMP) is the successor to Chesapeake Midstream, after it bought Chesapeake Energy’s (NYSE: CHK) midstream assets. At the same time Williams (NYSE: WMB) acquired a 50 percent stake in Access Midstream’s general partner from the master limited partnership’s private equity sponsor. ACMP is now one of the largest midstream companies in the US with gathering pipelines and facilities in the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara and Utica shales, and elsewhere in the Mid-Continent.

Investors liked the moves ACMP made in 2013, bidding up units 70 percent. The downside of this surge is that investors who are just now buying in are getting in at a lower yield, as growth in the distribution hasn’t matched the rise in the unit price. Despite the fact that quarterly distributions grew from $0.435/unit to $0.535/unit, the yield has declined from 5.2 percent a year ago to the current level of 3.8 percent. Long-term investors will have no complaints given the past year’s capital gains. But those thinking of investing today should consider that something probably has to give, and that the falling yield will sooner or later start to put the brakes on the appreciation.

Rose Rock Midstream (NYSE: RRMS) isn’t a name we have discussed much here. RRMS is an MLP that owns oil-gathering, storage and transportation assets in Colorado, Kansas, Montana, North Dakota, Oklahoma and Texas. The MLP was formed by midstream energy giant SemGroup (NYSE: SEMG), which acts as the general partner. RRMS had its IPO in December 2011 with an initial EV of $1.2 billion and a minimum yield of 4.7 percent.

RRMS didn’t see the same kind of price surge in 2013 as ACMP, so offers a more generous  annualized yield of 5.2 percent. RRMS also has a lower total debt/equity (mrq), at 22 percent versus ACMP’s 71 percent. For Q3 2013, RRMS reported $15.4 million in adjusted EBITDA, a year-over-year increase of 65 percent. In comparison, adjusted EBITDA for the 2013 third quarter totaled $227 million for ACMP, an increase of 90 percent year-over-year.

Tesoro Logistics (NYSE: TLLP) was spun off by the refiner Tesoro (NYSE: TSO) in 2011 to operate pipelines leading to and from its plants. TLLP’s assets consist of a crude oil gathering system in the Williston Basin area of North Dakota and Montana, 17 refined product and storage terminals, three dedicated storage facilities, four California marine terminals, a rail unloading facility, and a petroleum coke handling facility.

Distributions have  grown steadily since the IPO, from $1.35 per unit (annualized) in Q2 2011 to the current annualized level of $2.18/unit. At a current unit price of $53.49, TLLP is well off its 52-week high of $71.92. Distributions have increased each quarter since the IPO, and units currently have a yield of 4.2 percent. But investors should be wary given that TLLP is highly leveraged. Its total debt/equity (mrq) is nearly 400 percent, much higher than most competitors.

Of the three MLPs — ACMP, RRMS and TLLP — RRMS looks best at the moment with the least downside risk. It is by far the least-leveraged, didn’t have a huge run-up in 2013 that depressed its yield, and it has managed to steadily grow revenues and distributions since its IPO.    

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

No Quit in EQT Midstream

The stock market’s had a hard time of late, and at long last master limited partnerships have begun to outperform, aided by the recent decline in Treasury bond yields.

None of the names we recommend has been quite as steady, or as strong, of late as EQT Midstream (NYSE: EQM), the EQT Resources (NYSE: EQT) affiliate growing by leaps and bounds as its sponsor develops its liquids-rich Marcellus acreage.

The latest proof came Thursday, just after the unit price hit another record high, as EQM announced a distribution increase of 7 percent from the preceding quarter and 31 percent year over year. The payout rose to 46 cents per unit, and if EQM continues to hike it by at least 3 cents per quarter, as planned, it will pay out at least $2.02 per unit this year, for a prospective yield of 3.3 percent at the current share price.

That’s a nice bonus for an investment that continues to offer rapid growth as the main attraction. Earnings results are due Feb. 17, and we’ll be open to reconsidering our buy target if they prove impressive. For now, buy EQM below $51.    

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