Growth and income. What more could you want in aninvestment
Seem impossible? It is, in fact, within your reach.
With the United States is poised to become the world's leading
oil producer by 2017 and a net oil exporter by 2030,
opportunities abound to boost profits for U.S. oil pipelines and
So how does this figure into the growth/income balance? It's
all bundled in one acronym: MLPs, or masterlimited partnerships
These companies own the pipelines, storage facilities and
terminals that move oil from the wellhead to the refinery and
from refineries to rail and shipyards. Pipeline MLPs have
stable business models that generate strong income; they depend
more on thevolume of product transported than on energy
In addition, competitive pricing pressures are mostly absent
because pipelines serve different geographic areas. As a result,
pipeline MLPs typically pay generous distributions and yields as
high as 5% to 6%.
One of my favorite pipeline MLPs is forecast to grow income by
37% nextyear . This MLP looksundervalued at a forward
price-to-earnings (P/E ) ratio of 16, despite share pricegains of
more than 40% in the past 12 months. And this MLP yields 5% and
has raised payout 50% in the past seven years.
So what is my favorite pipeline MLP?
TransMontaigne Partners (
. It owns terminals, storage facilities and related assets along
the Gulf Coast, in the Midwest and Southeast, and along the
Mississippi and Ohio Rivers.
TransMontaigne provides services under long-term (and mostly
fixed-rate) contracts to marketers of crude oil, petroleum,
chemicals, fertilizers and otherliquid products. It operates
49 terminals that represent 23.4 million barrels of storage
capacity. The MLP has a leading presence in five major oil and
The company's Gulf Coast terminals have 6.9 million barrels of
storage capacity and handle product from the Caribbean and Latin
America. TransMontaigne's Southeast terminals are located along
various points of the Plantation and Colonial pipelines and have
storage capacity of approximately 10 million barrels.
TransMontaigne's Brownville, Texas, terminals handle shipments
between the Gulf of Mexico, northern Mexico and the United
States, and have Mexican energy giant PEMEX as a major customer.
Facilities in Oklahoma, Missouri and Arkansas provide transport
and terminal services to Shell Oil-U.S. -- a division of
Royal Dutch Shell (NYSE: RDS-A)
Roughly two-thirds of this MLP's income is generated by
fee-based, long-term contracts. These contracts ensure a
predictable income stream to cover future
TransMontaignewill experience robust growth next year due to
its 42.5% ownership stake in an oil terminal under construction
on the Houston ship channel. In December 2012, the MLP paid $79
Kinder Morgan (
for a stake in Battleground Oil Specialty Company
The BOSTCO terminal is ideally positioned to benefit from
rising U.S. energy exports.
Initially, 50 tanks with 6.1 million barrels of storage
capacity will be built. The project will cost about $425 million.
Operations will begin in late 2013; the full 6.1 million barrels
of storage capacity and related infrastructure are due to come on
line in early 2014. In addition, TransMontaigne plans to build a
bolt-on expansion project that will add another 900,000 barrels
of vapor-to-liquid storage to BOSTCO later this year.
BOSTCO will have a powerful effect on TLP.
Analysts forecast 37% income growth next year when the BOSTCO
terminal is fully operational, and TransMontaigne'sCEO expects
the new terminal toput the company on a growth trajectory for the
next several years.
The BOSTCOacquisition was the main reason that Stifel Nicolaus
recently upgraded TLP'srating to "buy" from "hold." The boost in
income from the new terminal shouldsupport rising payouts to
TransMontaigne investors in the years ahead, something they have
Since 2009, TransMontaigne's income has grown 25% to $42.1
million; distributablecash flow has increased 32% to $58.1
million; and distributions to investors have improved 31% to
TransMontaigne's financial ratios also stack up well against
industry peers. In the past 12 months, the MLP has posted anet
margin of 25% and areturn on equity (ROE) of 10%. This compares
favorably to peers' net margins averaging 9% and ROE averaging
At astock market value of $734 million, TransMontaigne is
smaller than industry peers
Holly Energy Partners (
DCP Midstream Partners (
, which are valued at more than $2 billion each. However, its
smaller size has benefits -- TransMontaigne experiences better
gradual growth potential from small acquisitions and expansion
Risks to consider:
The MLP is controlled by affiliates of TransMontaigne Inc.
and Morgan Stanley, which gives Morgan Stanley the power to veto
significant acquisition or investment decisions. In addition,
TransMontaigne may take on debt tofund its portion of BOSTCO
construction costs. The MLP recently filed a $1 billion shelf for
a mixed debt and/orequity offering .
Action to Take -->
TransMontaigne has provided 66% gains and an 8% averageyield to
investors in the past five years. In addition, the MLP's recent
acquisition of a stake in the BOSTCO deep water terminal is a
majorcatalyst for future income and distribution growth.
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