Merrill Lynch is reevaluating its position on a few master limited partnerships (MLPs) as it transfers coverage to analyst John Abbot from Nitin Kumar. Year to date, Merrill Lynch’s upstream MLP universe was down roughly 50% from its highs, with some names in the mix trading at yields in excess of 20%. This reflected some market concerns about whether some companies can maintain their distributions.

Two companies, Breitburn Energy Partners L.P. (NASDAQ: BBEP) and Legacy Reserves L.P. (NASDAQ: LGCY), acknowledged this concern and have stated that distributions may be cut if oil prices remain weak for two years.

Despite the uncertain outlook for oil prices, Merrill Lynch is not downgrading any of its Buy- or Neutral-rated names in this sector as a statement of confidence for the long term. That being said, 2015 could pose a challenge for this group, depending on how oil prices behave.

Looking into 2015, a big theme that could emerge for this group would be unit buybacks. Considering that some equity yields are in excess of 20%, it would make sense for a repurchasing of distressed shares. Memorial Production Partners L.P. (NASDAQ: MEMP) has already announced that it has authorized up to $150 million of unit buybacks.

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Out of its upstream MLP coverage universe, Merrill Lynch picked Memorial Production Partners to be its top performing 2015 upstream MLP. The company is down 40% year-to-date and is trading at a 16% yield. It has roughly $1 billion in liquidity, which accompanied by its hedges should allow it to provide ample cushion for distributions in both 2015 and 2016. Merrill Lynch lowered its price objective to $22 from $24, compared to a consensus analyst price target of $20.55. Shares of Memorial Production Partners closed Friday up 10% at $14.41, in 52-week trading range of $11.75 to $24.75.

In the analyst report, John Abbot said:

From here, the performance of the group is likely to be highly correlated with the outlook for crude. Our house view is that pricing should rebound in the 2nd half of the next year to over $80/barrel by the 4th quarter. Should this scenario occur, we see it as a significant potential catalyst for the sector as a whole. While we acknowledge there is the risk that oil prices do remain weak, over the long term, given the incremental cost of the supply and potential demand response to lower oil price, we believe pricing will eventually need to move higher.

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Merrill Lynch indicated a few other price objective movements in the report:

• EV Energy Partners L.P.’s (NASDAQ: EVEP) price objective was lowered 24% to $32 from $42. The stock has a consensus analyst price target of $34.00 and a 52-week trading range of $20.01 to $41.97.
• Legacy Reserves saw its price objective lowered 38% to $18 from $29. The consensus analyst price target is $21.13, and the 52-week trading range is $10.05 to $32.61.
• Breitburn Energy Partners had its price objective lowered 29% to $15 from $21. The consensus price target is $16.33. The 52-week trading range is $6.46 to $23.15.

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