EXCLUSIVE: Restructure Your Energy Portfolio By Finding Trustworthy MLPs

Energy investors should consider Master Limited Partnerships (MLPs) to diversify their portfolio structures. Best known for their function in REITs, MLPs deliver periodic payments to their investors from cash flows.

MLPs make up a huge portion of the energy market with more than 100 funds worth over 450 billion dollars.

In an exclusive interview with Benzinga, Julie Hilt Hannink of CFRA explained how not all MLPs are created equally and what investors should look for. CFRA looks for situations where reported accounting figures do not give a complete look at a company’s health.

MLP investors have to be especially careful because the general partner has a significant amount of discretion for accounting figures. “The distributable cash flow number [what is available to be returned to investors], is basically net income, plus depreciation, less maintenance capex,” Hilt Hannink explained. The capex figure draws controversy because there is limited public data to verify theoperation’s actual expenses.

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When looking for MLPs to invest in, Hilt Hannink explains the coverage ratio is a good place to start. Investors “should look for rolling four quarter coverage ratios around 100 percent.”

“You can live with a quarter here or a quarter there not being 100 percent as long as you understand why.” Seasonality is an example of an acceptable coverage ratio below 100 percent for a quarter.

“If they have a rolling four quarter below 100 percent and they are seeing big gains in net income and big gains in distributable cash, they might be conserving their apparent growth in the future when they don’t have growth opportunities.”

MLPs typically trade at multiples suggesting distribution growth in the future. Low coverage ratios are characteristic of companies who see their growth coming to a halt.

Hilt Hannink emphasizes that the key for investing in MLPs is looking through accounting records to find holes in what the company is guiding for, a task she specializes in at CFRA.

The most well known energy MLPs include Linn Energy LINE, Kinder Morgan Energy Partners KMP,and Enterprise Products Partners EPD.