Brent crude hit the $80 a barrel level for the first time since 2018 this week, and West Texas Intermediate isn’t far behind, trading just below $75. In addition, natural gas is closing in on $5.50 per million Btu and is hitting all-time highs in Europe. Despite the constant climate change arguments, the fact of the matter is that the internal combustion engine is not going away anytime soon. In addition, despite the constant chatter over electric vehicles, there is one issue rarely discussed: They need electricity, which requires power generation, which in many cases requires natural gas.
Many investors are staring at the high commodity prices and wondering what is the best way to play the energy sector. For those that need solid income and the potential for growth, the best way may be via energy master limited partnerships (MLPs). BofA Securities just resumed coverage on the MLP arena, and we found five that pay massive distributions and are rated Buy. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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Energy Transfer
This top MLP is a very safe way for investors looking for energy exposure and income. Energy Transfer L.P. (NYSE: ET | ET Price Prediction) owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint in all the major domestic production basins.
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This publicly traded limited partnership has core operations that include complimentary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids (NGLs) and refined product transportation and terminaling assets; NGL fractionation; and various acquisition and marketing assets.
Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG, as well as the general partner interests, the incentive distribution rights and 28.5 million common units of Sunoco, and the general partner interests and 39.7 million common units of USA Compression Partners.
Investors receive a 6.37% distribution. The BofA Securities price target is $14, while the consensus target is $13.88. The shares closed on Wednesday at $9.58.
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Enterprise Products Partners
This is the largest publicly traded energy partnership and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, NGL fractionation, import and export terminaling, and offshore production platform services.
One reason many analysts may have a liking for the stock might be its distribution coverage ratio. This ratio is well above 1 times, making it relatively less risky among the MLPs.
The Enterprise Products Partners distributions have grown consistently over the years, and last year it announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.45 per common unit, or $1.80 per unit on an annualized basis.
Investors receive an 8.23% distribution. BofA Securities has a $32 price target, and the consensus target is $28.17. Shares closed at $21.88 on Wednesday.
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MPLX
This is the top holding for the ALPS Alerian MLP ETF (NYSEARCA: AMLP). MPLX L.P. (NYSE: MPLX) is primarily engaged in crude oil and refined products transportation and terminaling in the U.S. Midwest and Gulf Coast regions, as well as natural gas gathering and processing in the northeast from its prior acquisition of MarkWest Energy in 2015. MPLX was formed by independent U.S. refiner Marathon Petroleum.
MPLX is one of the bigger pipeline entities, with a market capitalization of nearly $30 billion, and the company repurchased a strong $155 million in units during the second quarter. The partnership currently has approximately $657 million remaining under its board authorization and that kind of buying by management tends to keep a bid under the stock price.
Investors receive a 9.57% distribution. The $36 BofA Securities price target compares with the $32.88 consensus figure and Wednesday’s closing print of $28.75.
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Western Gas Partners
This is a defensive play with a great balance sheet and limited commodity price risk. Western Midstream Partners L.P. (NYSE: WES) is a growth-oriented master limited partnership formed by Anadarko Petroleum to acquire, own, develop and operate midstream energy assets.
Western Gas Partners has midstream assets located in the Rocky Mountains, the Mid-Continent, north-central Pennsylvania and Texas. The company is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko, as well as for other producers and customers.
Investors receive a 6.04% distribution. The BofA Securities $25 price target is the same as the consensus target. Wednesday’s close was at $21.11 a share.
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These four top companies offer reasonably safe and reliable distributions, plus they are major players in the energy infrastructure arena. Investors looking for solid total return potential can do well owning these MLP leaders. Remember, though, that MLP distributions may contain return of principal. Those looking to avoid the pesky K-1s can always purchase shares in the ALPS Alerian MLP ETF. Investors receive a 1099 instead of a K-1.
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