The overarching benefit to holding master limited partnership (MLP) assets is the high income steam ...
A Non-Traditional MLP
09/29/2013 9:00 am EST
Income expert Elliott Gue updates the outlook for MLPs and has one non-traditional MLP that he likes now.
SPEAKER 1: My guest today is Elliot Gue. Thank you, Elliot, for joining me. Good to see you again.
ELLIOT: Good to see you too. Thanks for having me.
SPEAKER 1: So, at the show here, you have been getting questions on Master Limited Partnerships and you want to talk about how the industry is doing right now. Are we still seeing merger and acquisition activity in there or do you have any favorites? Well, they are mostly oil and energy companies anyway, but do you have any favorites in there?
ELLIOT: Sure, the MLP industry has been doing very well and, of course, it is a high yielding group. The average MLP yields about 6% and that has been very popular because there are not many income investments out there.
SPEAKER 1: Right.
ELLIOT: Of course, when interest rates ticked up a little bit, the sector did pull back. I think that is less of a problem long-term because one of the things that MLPs have that, for example, bonds don’t offer is a potential for growth and distribution over time.
SPEAKER 1: Sure.
ELLIOT: Unlike a fixed income product, your average MLP is probably growing its payout at 6% or 7% a year, some of them a lot higher than that, so a lot of the MLPs we are looking at right now are parts of the industry where we are seeing more growth, where we see the potential for faster than average distribution growth.
SPEAKER 1: What sectors would that be in?
ELLIOT: Well actually, some of the ones that we have been focusing on lately have been nontraditional MLPs. Most MLPs are involved in the pipeline business or some storage. One example is Hi-Crush LP. This company, HCLP is the symbol; the company makes or mines proppant. Proppant is basically sand that is put in fracturing fluid, when you fracture an oil or gas well. What it does, when you fracture a well, you are basically artificially creating cracks in the reservoir that help aid the flow of oil or gas into the well. Proppant actually keeps those fractures open once you relieve the pressure of the fracturing fluid. Most proppants in the country, about 75% is raw sand and they have a bunch of mines in Wisconsin, which, believe it or not, is the Saudi Arabia of proppant sands.
SPEAKER 1: That is interesting. I thought it was just cows and cheese.
ELLIOT: Right, exactly. It is about 80% or more than 80% of the proppant sand produced in the US comes from the State of Wisconsin and more than 90% comes from that part of the Upper Midwest. They own a couple of mines there, very low cost of production, access to unit trains, which allows them to very cheaply move the proppant sand from their mines to their customers.
SPEAKER 1: I was going to ask you if that was the mode of transportation.
ELLIOT: Yeah, that is typically the mode of transportation and with a unit train, unit trains are kind of like an express service so it is kind of like the express lane of the highway. They don’t stop the train to add additional cars from other companies so it moves with a faster velocity and they also have a lower cost per train carload whereas they obviously have a lot more carloads than average. Your average well in the US might have 500 tons of proppant in it when you fracture our share wells so that is a lot to move so they typically do use rail to transport that. It has over an 8% yield and I think it will probably be able to grow at about 10% or 15% annualized in the next few years.
SPEAKER 1: Wow. What is the approximate price of it right now>
ELLIOT: Well, you know, HCLP is trading up in the $25 area and I would look to buy it under that level right now.
SPEAKER 1: Okay, super. Well, thanks for joining me.
ELLIOT: Thanks for having me.
SPEAKER 1: And thanks for being with us on the MoneyShow.com video network.
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