Earn Up to 9.5% in Energy Yields (Without Binge-Watching CNN)

The article highlights energy infrastructure companies, particularly master limited partnerships (MLPs), as steady income plays due to their "toll collector" business model, which is less sensitive to commodity price volatility than exploration and production companies. It suggests Kinder Morgan (KMI), Plains All American Pipeline LP (PAA), Western Midstream Partners LP (WES) and USA Compression Partners LP (USAC) as potential investment opportunities, noting their yields ranging from 4.2% to 9.5%, but cautions investors to consider factors like distribution cut history and growth potential; it also suggests considering the Alerian MLP ETF (AMLP) for diversified exposure.

Analysis

Energy infrastructure companies, particularly master limited partnerships (MLPs), are presented as compelling income investments due to their "toll collector" business model, which generates steady cash flows largely insulated from direct commodity price volatility, unlike exploration and production firms. This stability is exemplified by the Alerian MLP ETF (AMLP), which demonstrates significantly less volatility compared to a broad basket of energy stocks (XLE). Kinder Morgan (KMI), with a 4.2% yield, operates 79,000 miles of pipelines and has been restoring its dividend at an approximate 11% annual rate since 2018, following a 75% cut in 2015; its 0.75 beta indicates lower volatility than the broader market. Plains All American Pipeline LP (PAA) offers an 8.2% yield and showed recent strength with NGL pipeline volumes up 9% and fractionation volumes up 23%, but faces risks from US-China trade tensions impacting NGL demand and a concerning history of three distribution cuts between 2016 and 2020, despite a recent 20% hike. Western Midstream Partners LP (WES) yields 9.5% and, while its 2020 payout cut was an isolated incident, a recent 4% distribution increase represents a significant slowdown from a prior 50% raise, with future capital expenditures for projects like Pathfinder potentially constraining distribution growth. USA Compression Partners LP (USAC) provides an 8.4% yield and boasts a low 0.4 five-year beta due to long-term contracts, but its distribution has remained stagnant for a decade as heavy investments have prioritized growth over debt reduction and increased payouts. For diversified exposure, the Alerian MLP ETF (AMLP) holds 13 MLPs and offers a 7.9% yield. The overall sentiment of the source material is strongly positive towards this sub-sector's income characteristics.

Key Decisions for Investors

• Investors seeking high current income and lower volatility relative to the broader energy sector should consider allocations to energy infrastructure MLPs, focusing on the stability of their fee-based revenue models.
• Thorough due diligence on individual MLPs is critical, specifically examining distribution coverage and history (e.g., PAA's past cuts versus KMI's recovery), balance sheet leverage (e.g., USAC's debt impacting payout growth), and the impact of capital expenditure plans on future distribution growth (e.g., WES).
• For diversification within the MLP space and to mitigate idiosyncratic risks, consider ETFs like AMLP, which provides exposure to a basket of MLPs and a competitive yield, though investors should still be aware of the concentrated nature of such funds.
• Evaluate the sustainability of high yields by assessing factors such as counterparty risk (e.g., WES's reliance on OXY), sensitivity to interest rate changes, and specific market exposures like PAA's NGL segment to international trade dynamics.