A High-Yield Stock Most People Have Never Heard Of
Today’s chart highlights a hidden high-yield opportunity, NGL Energy Partners LP (NYSE:NGL).
As a master limited partnership (MLP) headquartered in Tulsa, Oklahoma, NGL Energy Partners LP doesn’t really make headlines in financial media. Instead, it runs a typical midstream energy business, which includes transporting crude oil from the wellhead to refiners, moving natural gas liquids (NGLs) from fractionators to refineries and end users, and delivering refined products from refiners to customers.
Other than transportation, the partnership also provides energy products storage, blending, and marketing services, as well as water solutions.
Obviously, these businesses are not as exciting as, say, building the “next big thing” in tech. But the sheer size of NGL Energy Partners’ payout makes its units stand out.
With a quarterly distribution rate of $0.39 per unit, NGL stock offers a jaw-dropping yield of 11.5%.
Of course, we know that with a yield like this, there will likely be some trade-off. Indeed, while NGL Energy Partners provides an oversized current income stream, investors who also want dividend growth should probably look elsewhere.
In the company’s latest earnings conference call, NGL Energy Partners’ CEO Michael Krimbill said, “We have been very clear that distribution increases will not happen with a double-digit yield.” (Source: “NGL Energy Partners LP (NGL) CEO Michael Krimbill on Q3 2019 Results – Earnings Call Transcript,” Seeking Alpha, February 11, 2019.)
Still, in an era when most companies don’t even pay five percent, a current yield of over 11% is already attention-grabbing, even when the stock doesn’t offer dividend growth.
The big question now is, can the partnership cover its massive current payout?
Improving Distribution Safety
Well, to answer that question, we need to take a look at NGL Energy Partners’ distribution coverage ratio. That is calculated by dividing the company’s distributable cash flow by its actual cash distributions paid for a given reporting period. If the ratio is above one, it means the partnership generated more than enough cash to support its payout.
According to its latest investor presentation, NGL Energy Partners LP achieved a distribution coverage ratio of 1.05 times in the 12-month period ended December 31, 2018, indicating that the partnership outearned its cash distributions for the calendar year. (Source: “Investor Presentation March 2019,” NGL Energy Partners LP, last accessed March 18, 2019.)
Moreover, this represented a substantial improvement from a year ago. In the 12-month period ended December 31, 2017, NGL Energy Partners had a distribution coverage ratio of just 0.68 times.
The reason behind this was simple: while the partnership was paying the same distribution per unit in both calendar years, it managed to generate substantially more cash from its operations in 2018.
For instance, the company’s latest earnings report showed that NGL Energy Partners LP generated a distributable cash flow of $84.9 million for the three-month period ended December 31, 2018. This marked a whopping 39.6% increase from the $60.8 million earned in the year-ago period. (Source: “NGL Energy Partners LP Announces Third Quarter Fiscal 2019 Financial Results,” NGL Energy Partners LP, February 11, 2019.)
Distribution Coverage Ratio
(Source: “Investor Presentation March 2019,” NGL Energy Partners LP, op cit.)
And the best could be yet to come. For NGL Energy Partners’ fiscal-year 2019, which will end on March 31, management expects that the partnership will report a distribution coverage ratio of 1.1 times. And according to Krimbill, the company’s distribution coverage ratio “was climbing rapidly, and soon will be at 1.3 times or better.” (Source: Seeking Alpha, op cit.)
In other words, NGL Energy Partners is expected to generate distributable cash flow that’s 30% more than what’s needed to fund its current distribution policy. In the world of double-digit yielders, it’s rare to see a margin of safety as wide as 30%.
To achieve that objective, the partnership will focus on businesses that can generate long-term, fee-based cash flow. In particular, NGL plans to increase cash flows that are supported by multi-year contracts that include acreage dedications or volume commitments. This way, the partnership can limit its exposure to volatility in commodity prices.
The Bottom Line on NGL Energy Partners LP
At the end of the day, keep in mind that, like most ultra-high-yielding stocks, NGL Energy Partners LP is not perfect. In April 2016, the partnership reduced its quarterly distribution rate from $0.64 per share to $0.39, marking a 39% reduction. (Source: “Distribution History,” NGL Energy Partners LP, last accessed March 18, 2019.)
And as mentioned earlier, the partnership doesn’t plan to increase its payout at the moment.
However, for investors who understand the underlying risks with the business and are willing to forgo distribution growth for current income, NGL stock’s outsized yield and improving distribution coverage would make it worth a serious look.