Refining the Refined Products MLP Model
Despite flat to declining volumes, we think refined products MLPs offer compelling value.
Master limited partnerships (MLPs) have gained popularity over the years thanks to their steady distribution payments and attractive tax-advantaged total returns. Underpinning this growth are hard assets that typically deliver very stable, repeatable cash flows, supporting mid- to high-single-digit yields. One of the most stable MLP business models over the past few decades, in our view, has been that of refined products MLPs, which transport, store, and blend crude oil and refined petroleum products.
Refined products MLPs collect tariffs to transport crude or products a given distance, akin to toll-booth operators. Storage and blending services are also fee-based, allowing the MLPs to avoid taking title of the products and associated commodity exposure. One unique feature of crude oil and refined products pipelines is the Federal Energy Regulatory Commission's (FERC) regulatory price indexing, which allows interstate pipelines to change rates each July according to an index--currently Producer Price Index plus 1.3%. The FERC also prevents new interstate pipelines from being built unless deemed economically necessary, creating monopolies in some cases. Together, these traits make for a wide-moat business. Across our coverage, refined products limited partnerships have averaged 10% annual distribution growth since inception, while general partnerships--juiced by incentive distribution rights--have averaged 15%.
Avi Feinberg does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.