Focused on Yield? The New Breed of MLPs You Might Be Overlooking
Companies like Seadrill, Lehigh, and Hi-Crush are set to offer income and growth through capital appreciation that will deliver superior total returns.
Lehigh Gas Partners (NYSE:LGP), a wholesale distributor of motor fuels to gas stations and truck stops, went public in October 2012 at $20 and is currently trading around $25 per share. The company owns and leases real estate used in the retail distribution of motor fuels and currently has 345 sites mostly in the Northeast and Central Valley of Ohio.
It has close ties to Lehigh Gas-Ohio, LLC from which assets are dropped down and then leased to a third party. For example, it recently acquired 19 sites in the Cleveland market which it in turn leased to 7-Eleven who will rebrand the locations and manage the convenience store operations.
Lehigh collects the leasing fee and also has a separate 10-year contract to continue to supply fuel to the sites. This combination should provide stable cash flow and leaves Lehigh relatively insulated to commodity price. It does, of course, have some exposure to real estate and flucuating driving volumes.
The company recently reported its first full quarter earnings asa publicly traded MLP and took that opportunity to boost its distribution by a 3.4% increase to $1.81 per unit. This translates into a very healthy 7.6% annual yield.
The company's access to low-cost capital -- it recently increased the size of its credit facility by $75 million to $324 million and amended certain terms of the agreement to allow for greater leverage and flexibility with regards to acquisitions -- should provide a wide-open field for it to both increase the density of its properties, which would improve margins, and expand its footprint, which would provide the leverage and diversification of scale.
Hi-Crush Partners (NYSE:HCLP) is a producer and supplier of monocrystalline sand, a proppant used by drillers to enhance the recovery rates of hydrocarbons in hydraulic fracturing operations in oil and natural gas wells. The company went public in August of 2012 at $17 a share and quickly traded up to a high of $23 one month later. But it then ran into trouble in November when Baker Hughes (NYSE:BHI), one of its only four customers, decided to bail on its contract. That sent shares down to as low as $13.30. While it has not replaced that business, its recent earnings report was solid enough, and the remaining contracts seem secure, with an average of over three years remaining, to give investors confidence to bid shares back to its current $21 level.
Still, that event highlighted the risk of having such a concentrated portfolio; Hi-Crush had just one facility in Wisconsin. Last week management went out and acquired privately held D&I Silica for $125 million. While the assets it's acquiring don't come with any sand reserves, D&I is a distributor; it more than triples the potential addressable market. It also moves Hi-Crush up the value chain in a step toward a more vertically integrated model. As a distributor, D&I Silica adds new customers while deepening Hi-Crush's relationships with its current customers. While most of the sand that D&I procures is already supplied under long-term contracts, the deal does open up possibilities for Hi-Crush to eventually leverage these assets into supply deals for its sand once these existing contracts roll off.
As far as its existing business Hi-Crush has a clear competitive advantage thanks to being the low-cost producer of frac sand. Its sand reserves are shallow and therefore can be surface mined without require the blasting and heavy equipment needed for underground mines. Also, unlike some competitors, its processing and rail loading facilities are located on-site, which eliminates the need for on-road transportation, lowering product movement costs.
While it may take some time for the D&I transaction to really bear fruit, it does lay out a growth path, which will now include expansion into Bakken, Permian, and Eagle Ford production basins. Management has promised that distribution will increase by double digits in 2014, but until it gets a few more stable quarters under its belt, I'd take that promise with a grain of sand.
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