Energy

UBS Adds Top Pick Growth and Dividend MLPs to Buy as Oil Rockets Higher

Lee Jackson

Published: December 1, 2016 9:55 am

Last Updated: January 12, 2020 5:15 pm

After underperforming for most of the fall, the energy master limited partnerships (MLPs) have taken a solid turn for the better as the prospects for infrastructure growth have increased dramatically with a Trump administration. While the ultra-high distribution, low-growth companies were the ones that investors tended to favor in the first half of this year, many are starting to realize what the analysts at UBS already know: high yields are eventually unsustainable when there is capital to be raised and can often be adjusted downward.

A new UBS research report adds two to the Top Picks MLP list of stocks. The analyst also noted this in the report:

With investors increasingly seeing the argument of cumulative distributions recently debunked as higher yields are being adjusted through upfront distribution cuts or through backdoor resets, mispriced high-growth is increasingly more attractive.

While the top ideas at UBS are more growth oriented, they all still pay outstanding distributions, and of course, all are rated Buy at UBS.

MPLX

This company has reported very solid numbers and it may be off the radar for some investors. MPLX L.P. (NASDAQ: MPLX) is a diversified, growth-oriented MLP formed in 2012 by Marathon Petroleum to own, operate, develop and acquire midstream energy infrastructure assets. It is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of natural gas liquids; and the transportation and storage of crude oil and refined petroleum products.

The company made a very well-timed and strategic purchase of MarkWest Energy last year for approximately $1.28 billion. The deal combined MarkWest, the second-largest processor of natural gas in the United States and largest processor and fractionator in the Marcellus and Utica shale plays, with MPLX. The combination created one of the largest MLPs, which is expected to generate a mid-20% compound annual distribution growth rate through 2019.

MPLX unitholders receive a 6.27% distribution. The UBS price target for the stock is $43, and the Wall Street consensus target is $39.06. Shares closed trading yesterday at $32.85.

Plains All American Pipeline

This is another of the top stocks on Wall Street that has had the power to withstand the downturn. Plains All American Pipeline L.P. (NYSE: PAA) owns and operates midstream energy infrastructure and provides logistics services for crude oil, natural gas liquids (NGLs), natural gas and refined products. It owns an extensive network of pipeline transportation, terminaling, storage and gathering assets in key crude oil and NGL producing basins and transportation corridors and at major market hubs in the United States and Canada. On average, Plains All American handles over 4.1 million barrels per day of crude oil and NGL on its pipelines.

The company also has one of the largest storage asset bases, with over 120 million barrels of liquids storage capacity at three major hubs, which are located in Cushing, Oklahoma; Midland, Texas; and Patoka, Illinois.

Investors are paid a 6.76% distribution. The UBS price objective is $34. The consensus price target is $31.93. Shares closed Wednesday at $32.95, up over 11% on the day.

PBF Logistics

This smaller cap company was added to the UBS Top Picks list. PBF Logistics L.P. (NYSE: PBFX) owns, leases, acquires, develops and operates crude oil and refined petroleum products terminals, pipelines, storage facilities and other logistics assets in the United States.

The company’s assets include Delaware City rail unloading terminal, a light crude oil rail unloading terminal, which serves Delaware City and Paulsboro refineries; Toledo truck terminal, a crude oil truck unloading terminal that serves Toledo refinery; DCR West Rack, a heavy crude oil unloading facility, which serves Delaware City refinery; and a terminaling facility with 27 propane storage bullets and a truck loading facility. Its storage facility consists of 30 tanks for storing crude oil, refined products and intermediates.

Unitholders receive a 9.44% distribution. UBS has a $31 price target, while the consensus target is $25.20. The shares closed at $18.65.

Shell Midstream Partners

This top stock has been cut in half from highs printed in the summer of 2015, and it is offering an outstanding entry point. It is the other new addition to the Top Picks list. Shell Midstream Partners L.P. (NYSE: SHLX) owns, operates, develops and acquires pipelines and other midstream assets in the United States.

The company owns interests in four crude oil pipeline systems and two refined products pipeline systems, as well as a crude tank storage and terminal system. Its crude oil pipeline systems include approximately 350 miles of Zydeco pipeline system from Houston to St. James and Clovelly, Louisiana; and Mars pipeline system originating approximately 95 miles offshore in the deepwater Mississippi Canyon and in salt dome caverns in Clovelly, Louisiana.

The company’s refined products pipeline systems consist of 158-mile Bengal pipeline system connecting four refineries in southern Louisiana to long-haul transportation pipelines; and approximately 5,500 miles of pipeline connecting refineries along the Gulf Coast to approximately 265 marketing terminals between Houston, Texas, and Linden, New Jersey.

Investors receive a 3.51% distribution. The $47 UBS price objective is well above the consensus target of $37.11. The shares closed at $27.58.

Tesoro Logistics

This is another very solid company for investors looking for more yield. Tesoro Logistics L.P. (NYSE: TLLP) is a logistics company operating primarily in the western and mid-continent regions of the United States. It operates through three segments: Gathering, Processing and Terminalling and Transportation.

The Gathering segment consists of a crude oil gathering system located in the Bakken Shale/Williston Basin area of North Dakota and Montana, which gathers and transports crude oil from various production locations, as well as natural gas gathering systems located in the Uinta basin, which provides natural gas and crude oil gathering and transportation services.

The Terminalling and Transportation segment owns and operates the northwest products pipeline and a jet fuel pipeline; 25 crude oil and refined products terminals and storage facilities in the western and Midwestern United States; four marine terminals in California; a rail-car unloading facility in Washington; a petroleum coke handling and storage facility in Los Angeles; and other pipelines, which transport products and crude oil from refineries to nearby facilities in Salt Lake City and Los Angeles, as well as a regulated common carrier refined products pipeline system.

Investors receive a 7.43% distribution. UBS has a $62 price target. Yet again, the consensus target is lower, at $56.33. The shares closed Wednesday at $47.13.

These top companies are offering investors an outstanding entry point after being clobbered much of the fall. The OPEC production cut combined with other positive metrics should put a tailwind behind the entire sector. It’s important to remember that MLP distributions may contain return of capital.