Now that oil prices have fully recovered from the drop to $20 a barrel in April 2020 — and demand for gasoline is rising — the outlook for the MLP sector this year is decidedly positive, notes Jim Pearce, chief investment strategist at Investing Daily's flagship newsletter, Personal Finance.

With a market cap of $52 billion, Enterprise Products Partners (EPD) is the most valuable MLP in the world. Its diverse portfolio of midstream assets includes 50,000 miles of pipelines, 260 million barrels of liquid petroleum storage capacity, 14 billion cubic feet of natural gas storage capacity, 55 processing facilities, and 19 deepwater docks.

Last year, EPD produced a total return (share price appreciation plus cash distributions paid) of 21.4%. Enterprise is also one of the highest rated MLPs with respect to its credit ratings of BBB+/Baa1. That’s important since, like most MLPs, Enterprise employs a lot of leverage to capitalize its balance sheet so having an investment-grade credit rating minimizes the cost of servicing that debt.

Enterprise has a target leverage ratio of 3.5 times total assets, which provides the company with enough liquidity to pay distributions and invest in new projects.

To that end, on January 6, Enterprise announced that it will acquire Navitas Midstream Partners for $3.25 billion in cash. This transaction will add 1,750 miles of pipeline to its network and more than 1 billion cubic feet per day of natural gas processing capacity.

This deal is not a game changer for Enterprise in the near term, but it will give the company access to 10,000 drilling locations within the Midland Basin that represent potential future revenue.

Given the size and scope of its operations, Enterprise is effectively a proxy for the North American midstream energy sector. It won’t catch anyone by surprise, but it should be able to keep raising its dividend in the future just as it has every year for the past 23 years so I am raising our buy limit for EPD to $26.

Unlike most other midstream MLPs, Magellan Midstream Partners (MMP) generates the majority of its revenue from the storage and transportation of gasoline and diesel fuel to end market users such as gas stations and convenience stores.

Magellan boasts that it controls the “longest refined petroleum products pipeline system in the U.S., primarily transporting gasoline and diesel fuel, with 9,800 miles, 54 terminals and 47 million barrels of storage.”

Its Crude Oil segment consist of 2,200 miles of pipelines that connect to the same refineries from which it transports refined products. During the third quarter of 2021, 71% of Magellan’s total operating margin came from its Refined Products segment while 29% was generated by its Crude Oil segment.

Magellan took a big hit in 2020 as the coronavirus pandemic greatly reduced demand for gasoline. But based on the company’s fiscal 2021 Q3 results, which included an 11% increase in net income over the same period the previous year, Magellan’s asset base is once again fully deployed. As a result, MMP produced a total return of 19.6% last year.

The company takes great pride in the fact that it has raised its annual distribution every year since 2001. Magellan’s most recent quarterly cash payment of $1.0375 per unit works out to a forward annual dividend yield of 8.4%.

With 85% of its operating margin generated by fixed-fee, low-risk activities, I see no reason why this MLP will not be able to bump its distribution again this year so Magellan remains a buy up to $54.

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