Meet the ‘Masters’ of High Yields: MLPs

Master Limited Partnerships, or MLPs, have traditionally been a good source of high-yielding securities. Many Master Limited Partnerships yield 5% or more, even double-digit yields in some cases. Of course, investors should not simply chase the highest yields-some high-yielding stocks have poor fundamentals and end up cutting their payouts to investors.

This article will discuss three top MLPs that have high yields and also strong coverage of their payouts.

Fill Up on Sunoco 

Sunoco (SUN) distributes a range of fuel products through its wholesale and retail business units. The wholesale unit purchases fuel products from refiners and sells those products to both its own and independently owned dealers.

Sunoco reported its second quarter earnings last month, showing revenues totaled $7.8 billion during the quarter, which was 78% more than the revenues that Sunoco generated during the previous year’s quarter. Fuel prices were up by a lot compared to the previous year’s Covid-impacted quarter, which boosted revenues. Fuel prices are mostly a flow-through item for Sunoco since Sunoco’s costs increase as well when fuel prices rise.

The revenue increase does not go hand in hand with an earnings increase of the same magnitude. Sunoco reported that its adjusted earnings before interest, taxes, depreciation, and amortization
was up 7% year-over-year, rising to $214 million during the quarter. Sunoco’s distributable cash flows totaled $159 million during the quarter, which was 10% higher compared to the previous year’s quarter, and which equated to DCF of $1.87 per share, which covered the dividend easily. For 2022, Sunoco is forecasting EBITDA of around $795 million to $835 million, representing growth of around 10% vs. 2021.

Sunoco is one of the largest independent fuel distributors, and Sunoco is also among the top distributors of Chevron, Exxon, and Valero-branded motor fuel in the rest of the United States. In the fuel wholesale industry, scale is important, as increased scale allows for 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 refined products terminals from NuStar Energy for $250 million, with these deals being expected to be accretive immediately after closing. Sunoco acquired an additional terminal from Cato, Inc. around the same time. In 2022, Sunoco closed the $190 million acquisition of a processing and terminal facility from Gladieux Partners. Sunoco currently yields 8.2%.

High Energy Holly 

Holly Energy Partners (HEP) is responsible for transporting and storing crude oil and refined products. The company operates its own crude oil and petroleum pipelines and storage terminals in 10 U.S. states, including Texas, Nevada and Washington. HEP also has refinery facilities 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 the revenues of HEP are fee-based. As a result, these revenues are hardly affected by 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 pose strict minimums to the customers of the MLP.

In early August, HEP reported financial results for the second quarter of fiscal 2022, showing distributable cash flow (DCF) grew 18% over last year’s quarter, thanks to higher volumes, which resulted from the acquisition of Sinclair Transportation.

HEP achieves growth thanks to contractual tariff escalators, which raise the fees it charges to its customers over time, and the addition of new pipelines. HEP has more than 800 miles of crude oil gathering facilities in the Permian Basin and can continue leveraging its footprint in this area for years.

HEP cut its distribution proactively in 2020 due to the pandemic but it is still offering an attractive 8.2% yield, with strong distribution coverage. Management has stated that it intends to keep the distribution constant this year. As HEP currently has a distribution coverage ratio of 1.7, we consider the new distribution 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 company that traces its history to 1848. The company has two business segments: Financial Advisory and Asset Management. The Financial Advisory business includes M&A, debt restructuring, capital raising, and other advisory business. The Asset Management business is about 80% equities and focuses primarily on institutional clients.

At the end of Q2 2022, Lazard had roughly $217 billion in assets under management (AUM). Lazard reported Q2 2022 results on July 28th, revealing that companywide operating revenue decreased (-18%) to $676 million from $821 million and diluted adjusted earnings per share decreased (-28%) to $0.92 from $1.28 on year-over-year basis on lower M&A deals and debt restructuring and lower assets under management (AUM). Financial Advisory operating revenue was $407 million, which was down (-14%) from $471 million in the prior year.

Lazard has been engaged in Vivendi’s acquisition of Lagardere, Resource REITs sale to Blackstone, Oi’s $20 billion carve out of fiber assets, Sierra Oncology’s sale 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, worldwide reach, diversity in asset management, long-term relationships, and ability to advise on complex transactions. The company is often the go to firm for complex global M&A transactions and restructuring. The company’s reputation also permits it to attract top talent, which is important in the advisory business. Notably, its managing directors have on average over 25 years of experience. Lazard units have a current yield of 5.4%.