Continued strong capital markets activity in MLP space is bullish

2013.02.14 - EPD Dividend YieldEnlarge GraphMaster limited partnerships (MLPs) are required to pay out much of their excess cash in the form of distributions to unitholders. Therefore, these companies often need to rely on outside financing (often through the form of debt or equity issuance) to fund growth projects. MLPs’ ability to access this capital is an important factor in their ability to grow. Last week, Genesis Energy (GEL), Martin Midstream Partners (MMLP), and Enterprise Products Partners (EPD) all accessed the capital markets at attractive costs of capital, which is a positive indicator for these companies and also the overall MLP space. Investors in MLPs such as the ones mentioned above or in MLP ETFs such as the Alerian MLP ETF (AMLP) may want to pay attention to capital markets activity in the space.

As mentioned, Genesis Energy accessed the capital markets last week. The company issued $350 million in debt at a rate of 5.75%. The last time Genesis raised money in the bond markets (January 2012), the company issued at a yield of 7.682%. Genesis was not only able to raise money, but was able to do so at an even more attractive rate. The chart below shows the effective yield on GEL bonds over time.

Additionally, Martin Midstream issued $250 million of debt at a rate of 7.25%. The last debt issuance that MMLP performed prior to this was in March 2010, at which point it issued $200 million of debt at a rate of 8.875%. Again, MMLP was able to raise money at a lower rate which is a positive for the company.

Lastly, Enterprise Products announced it priced eight million units at a price of $54.56 per unit, or a dividend yield of 4.8%. This is the lowest rate that EPD has been able to issue at in the past few years. The chart below shows the dividend yield of the past few years; the chart shows it is currently at one of its lowest points ever. The lower cost of equity for EPD is a positive for the company’s ability to invest in growth projects.

Enlarge Graph

In all three capital raises, the MLPs were able to raise money at attractive rates, which is a positive. This is because the lower the cost of capital for MLPs, the more projects they can pursue for growth. For instance: if an MLP can raise money at a cost of 6%, that means that theoretically projects with above a rate of return 6% are profitable to the company. The lower the cost of capital, the more projects become profitable (for more on this please see “Why the current capital markets environment is positive for MLP growth“). Last week’s capital markets activity demonstrated that MLPs are able to easily and cheaply access funds in the current environment, which is a positive data point for the above names (GEL, MMLP, EPD) and MLP ETFs such as the Alerian MLP Index (AMLP).