Meet the ‘Masters’ of High Yields: MLPs


Master Limited Partnerships, or MLPs, have traditionally been a good source of high-yield securities. A lot Master Limited Partnerships yield 5% or more, in some cases even double digit yields. Of course, investors shouldn’t just chase the highest returns – some high yield stocks have poor fundamentals and end up cutting their payouts to investors.

This article discusses three top MLPs with high yields and strong coverage of their payouts as well.

Tank at Sunoco

Sunoco (SUN) distributes a range of fuel products through its wholesale and retail divisions. The wholesale unit purchases fuel products from refineries and sells these products to both its own and independent dealers.

Sunoco reported its second quarter revenue last month, showing revenue in the quarter was $7.8 billion, which was 78% more than Sunoco’s revenue generated in the prior year quarter. Fuel prices were up a lot compared to the Covid-hit quarter of last year, boosting revenues. Fuel prices are usually a conduit for Sunoco, as Sunoco’s costs also rise when fuel prices rise.

The increase in turnover does not go hand in hand with a profit increase of the same magnitude. Sunoco reported that its adjusted earnings before interest, taxes, depreciation and amortization
rose 7% year-over-year, rising to $214 million during the quarter. Sunoco’s distributable cash flows totaled $159 million during the quarter, up 10% from the prior year quarter, and amounted to a DCF of $1.87 per share, easily covering the dividend. For 2022, Sunoco forecasts EBITDA of approximately $795 million to $835 million, a growth of approximately 10% from 2021.

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Sunoco is one of the largest independent fuel distributors, and Sunoco is also one of the largest distributors of Chevron, Exxon and Valero brand motor fuel in the rest of the United States. In the fuel wholesale business, scale is important, because scaling up leads to higher margins and a better negotiating position with suppliers.

Future growth is likely due to the company’s acquisitions. In August 2021, Sunoco agreed to acquire eight NuStar Energy refined products terminals for $250 million, and these deals are expected to increase immediately upon closing. Sunoco acquired an additional terminal from Cato, Inc. around the same time. In 2022, Sunoco completed its $190 million acquisition of a processing and terminal facility from Gladieux Partners. Sunoco is currently yielding 8.2%.

High energy holly

Holly Energy Partners (HEPA) is responsible for the transportation and storage of crude oil and refined products. The company operates its own crude and petroleum pipelines and storage terminals in 10 US states, including Texas, Nevada and Washington. HEP also has refineries in Utah and Kansas. HEP was founded in 2004 by HF Sinclair (DINO) and generates revenue by charging customers a fee for transporting and storing petroleum products.

Nearly all of HEP’s earnings are fee-based. As a result, these revenues are hardly affected by the prevailing commodity prices. Instead, they are proportional to the volumes transported and stored by the MLP. These volumes are reliable because they are determined by long-term contracts, which set strict minimums for the MLP’s customers.

In early August, HEP reported financial results for the second quarter of fiscal 2022, showing that distributable cash flow (DCF) grew 18% year-over-year, driven by higher volumes resulting from the Sinclair Transportation acquisition.

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HEP is driving growth through contractual rate escalators, which reflect the fees it charges its customers over time, and the addition of new pipelines. HEP has over 800 miles of crude oil collection facilities in the Permian Basin and can continue to leverage its footprint in this area for years to come.

HEP has proactively reduced its distribution in 2020 due to the pandemic, but it still offers an attractive 8.2% return, with strong distribution coverage. The management has indicated that it wants to keep the payment constant this year. Since HEP currently has a distribution coverage ratio of 1.7, we consider the new distribution to be safe. Units of HEP currently yield 7.5%.

Finance Play: Lazard

Lazard (LAZ) is a unique MLP in that it does not operate in the oil and gas sector, but in the financial sector. Lazard Ltd. is an international investment advisory firm whose history dates back to 1848. The firm has two business segments: financial advisory and wealth management. Its financial advisory activities include mergers and acquisitions, debt restructuring, capital raising and other advisory activities. The asset management business consists of approximately 80% equities and focuses mainly on institutional clients.

At the end of the second quarter of 2022, Lazard had approximately $217 billion in assets under management (AUM). On July 28, Lazard reported second-quarter 2022 results, which showed company-wide revenue declined (-18%) to $676 million from $821 million and diluted adjusted earnings per share declined (-28%) to $0.92 from $1.28 year-over-year on lower M&A and debt restructuring and lower assets under management (AUM). Financial Advisory’s revenue was $407 million, down (-14%) from $471 million in the prior year.

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Lazard was involved in Vivendi’s acquisition of Lagardere, the sale of Resource REITs to Blackstone, Oi’s $20 billion carve out of fiber assets, the sale of Sierra Oncology to GSK, Ferro’s sale to Prince International, and many other deals.

Lazard’s competitive advantage is derived from its reputation for excellence and integrity, global reach, diversity in asset management, long-term relationships and ability to advise on complex transactions. The company is often the address for complex global mergers and acquisitions and restructurings. The company’s reputation also makes it possible to attract top talent, which is important in the consulting world. The managing directors in particular have an average of more than 25 years of experience. Lazard stocks have a current return of 5.4%.

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