Distribution coverage ratio
In this part, we’ll compare Buckeye Partners (BPL), Sunoco Logistics (SXL), Tesoro Logistics (TLLP), and NuStar Energy (NS) on the basis of the distribution coverage ratio. The distribution coverage ratio is one of the most important metrics for analyzing MLPs (master limited partnerships).
The distribution coverage ratio is an MLP’s distributable cash flow divided by its distributions to limited partners. The higher the ratio, the greater the safety of the distributions. MLPs with high coverage will ideally trade at lower distribution yields to reflect this lower risk.
Sunoco Logistics has the highest TTM (trailing 12 month) distribution coverage ratio of 1.47x among our selected peer group. Buckeye Partners has the lowest coverage ratio of 0.97x. At the same time, Tesoro Logistics and NuStar Energy’s TTM coverage ratios are at 1.02x and 1.11x, respectively. Together, these four MLPs account for ~15.11% of the Alerian MLP ETF (AMLP). Sunoco Logistics and Tesoro Logistics are subsidiaries of Energy Transfer Partners (ETP) and Tesoro (TSO). Tesoro accounts for ~2.5% of the Energy Select Sector SPDR Fund (XLE).
Sunoco Logistics’ distribution coverage is driven by significant growth in its DCF (distributable cash flow). This doesn’t mean that its distributions haven’t grown in recent quarters. In contrast, its DCF per unit has grown at a much larger pace. This should mean that Sunoco Logistics trades at a relatively lower distribution yield compared to its peers. We’ll discuss this more in the next part of this series.
Buckeye Partners has a distribution coverage ratio of less than one. This might indicate that it isn’t generating enough DCF to cover its distributions. If the ratio continues to stay low in the long run due to insufficient DCF growth, the partnership might have to cut distributions. This should translate into a higher distribution yield for Buckeye Partners. For a detailed analysis of Buckeye Partners’ 1Q15 operating performance, read In-Depth Analysis: Buckeye Partners’ Recent Performance.
In the next part, we’ll compare the four peers based on their most recent distribution yield.