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The Master Limited Partnership Model Isn't Flawed, We're Using It Wrong

EPD Average Diluted Shares Outstanding (Quarterly) Chart
EPD Average Diluted Shares Outstanding (Quarterly) Chart

EPD Average Diluted Shares Outstanding (Quarterly) data by YCharts .

There is a pretty large bifurcation, here. Four companies -- Enterprise Products Partners , Alliance Resource Partners , Holly Energy Partners , and Magellan Midstream Partners -- each have only modestly issued shares. At the same time, the others -- Kinder Morgan, Energy Transfer Partners , and Williams Partners -- have all more than doubled their share counts over the same time period to fund development projects.

It's also no coincidence that the four companies that have not relied on equity issuances also happen to have payout policies that retain cash flow for growth.

Company Distribution Coverage Ratio (YTD 2015)
Enterprise Products Partners 1.3
Magellan Midstream Partners 1.36
Alliance Resource Partners 1.66
Holly Energy Partners 1.49
Energy Transfer Partners 0.97
Kinder Morgan 1.06
Williams Partners 0.97

Data source: Company earnings reports.

By retaining cash flow, these companies have been able to eschew the capital markets much more than their peers. While some of these companies have been dragged down by the sector-wide malaise, they are much less likely to experience a distribution cut, like so many others in the space, because of the way they have set themselves up.

It also goes to show that the structure of the master limited partnership is not a broken or flawed one. When a management team doesn't give into market pressure to raise distributions at breakneck pace, instead maintaining a more conservative approach, it can indeed be sustained over the long term. Furthermore, owning these kinds of master limited partnership can be a very lucrative investment.

EPD Total Return Price data by YCharts .

What a Fool believes

We're all a little to blame for what has happened with what should be one of the most stable and conservative segments of the energy sector. Our desire to chase those high growth rates that management sold us on led us down an unsustainable path. I know I was certainly guilty of getting starry-eyed at some master limited partnerships.

But it doesn't have to continue this way. As investors, we have choices in our investments. When making your investment decisions in this space, look for companies that have elected to eschew the all-too-common model of paying out investors all of their available cash and instead retain capital for future growth. In doing so, we can reward those companies that have elected this management practice and hopefully force others into more conservative behavior.

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The article The Master Limited Partnership Model Isn't Flawed, We're Using It Wrong originally appeared on Fool.com.

Tyler Crowe owns shares of Enterprise Products Partners and Magellan Midstream Partners. You can follow him at Fool.com or on Twitter @TylerCroweFool .The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Alliance Resource Partners, Enterprise Products Partners, and Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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