The most important part
The biggest upside to MLP spin-offs like MPLX is the guaranteed income. There has been a movement over the past five years or so for midstream companies to make the transition away from taking possession of the commodities that pass through their systems in exchange for fixed-fee transportation and processing contracts.
Fee-based income allows midstream companies to avoid commodity risk, which in turn results in stable cash flows. Gone are the days when performance would swing wildly with the volatile price of oil and gas. The bigger midstream companies that have been around for a while are making this transition as quickly as they can, but some are still hurt by commodity prices quarter after quarter. For example:
- Oneok Partners LP (NYSE:OKS) watched operating income at its NGL segment plummet $141 million because of lower NGL price differentials.
- Enterprise Products Partners L.P. (NYSE:EPD) saw natural gas processing and NGL marketing lose $66 million in gross margin in 2012.
- Despite record volumes and a strong hedging strategy, Kinder Morgan Energy Partners LP (NYSE:KMP)‘s CO2 segment failed to meet management’s expectations for growth because of pain inflicted by low NGL prices.
Of course, when prices go up, these midstream companies will benefit just the same as they are losing now. However, the draw to these companies as investments comes from the high-yielding distributions, the continuation of which is completely dependent on stable cash flows.
Foolish takeaway
Which brings us right back to our spin-offs. Right now, MPLX generates 100% of its revenue from fixed-fee pipeline contracts and storage agreements, primarily with MPC, but also with some third parties.
A similar MLP, Holly Energy Partners, L.P. (NYSE:HEP) generates 100% of its revenue from fixed-fee contracts with the refiner HollyFrontier Corp (NYSE:HFC). Holly Energy sports a 4.9% yield with zero exposure to commodity risk, which makes it a compelling investment.
As the months go by, investors will have more and more MLP spin-offs to choose from. Remember that fundamentals remain important, and having more options is all the more reason to be as picky as possible.
The article Is an MLP Spin-Off Right for This Energy Company? originally appeared on Fool.com and is written by Aimee Duffy.
Fool contributor Aimee Duffy owns shares of HollyFrontier. Click here to see her holdings and a short bio. If you have the energy, follow her on Twitter, where she goes by @TMFDuffy. The Motley Fool recommends Enterprise Products Partners L.P. and ONEOK Partners, L.P. The Motley Fool owns shares of Devon Energy.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
