Lower for longer is the current mantra of the energy master limited partnerships (MLPs), and most likely the rest of the sector as well. MLPs and midstreams were crushed in 2015, with the index down a stunning 37% as commodity prices tumbled, and the stress on producers jumped dramatically. Wise investors know that the solid companies can fight their way through to better days, but the question is on which horse to put one’s chips.
In a new report, the analysts at Deutsche Bank clearly lean toward the stronger players in the sector, those with wide footprints and solid balance sheets. So for at least the time being, they stick with the higher quality companies. They do see the potential for a bottom by the middle of the year, but in January that is in the distance, especially with oil closing in on $30.
Here are the four top picks to Buy now.
Enterprise Products Partners
This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, recently raised its distribution 1%. The company maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.
One reason many analysts may have a liking for this stock might be its distribution coverage ratio. That ratio is well above one times, making it relatively less risky among the MLPs. The company’s distributions have grown for several quarters and are expected to continue in 2016. Plus the Standard & Poor’s current rating is BBB+, which is investment grade, and the outlook is stable.
Enterprise Products Partners investors receive a 6.22% distribution. The Deutsche Bank price target on the stock is $30. The Thomson/First Call consensus price target is $33.82. Shares closed Wednesday at $25.09.
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EQT Midstream Partners
This one comes in as a top midstream play now at Deutsche Bank. EQT Midstream Partners L.P. (NYSE: EQM) is a growth-oriented partnership formed by EQT Corp. to own, operate, acquire and develop midstream assets in the Appalachian Basin. EQT Midstream Partners provides midstream services to EQT and third-party companies through its strategically located transmission, storage and gathering systems that service the Marcellus and Utica regions. The partnership also owns 700 miles, and operates an additional 200 miles, of FERC-regulated interstate pipelines. It also owns more than 1,600 miles of high- and low-pressure gathering lines.
The stock had a secondary offering late last year that some thought was ill-timed and dilutive, especially since the stock was down about 15% at the time. The bottom line is that at least they were able to go to the capital markets for additional funding and should be set for the foreseeable future.
EQT Midstream Partners investors receive a 3.74% distribution. While Deutsche Bank has a $90 price target, the consensus target is higher at $93.42. Shares closed Wednesday at $72.25.
MPLX
This company reported very solid numbers last year and may be more off the radar for some investors. MPLX L.P. (NASDAQ: MPLX) is a growth-oriented MLP formed in 2012 by Marathon Petroleum to own, operate, develop and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products and other hydrocarbon-based products. Its assets consist of a 99.5% equity interest in a network of common carrier crude oil and products pipeline assets located in the Midwest and Gulf Coast regions of the United States and a 100% interest in a butane storage cavern located in West Virginia, with approximately a million barrels of natural gas liquids storage capacity.
MPLX owns and operates a network of pipeline systems that include approximately 1,004 miles of common carrier crude oil pipelines and approximately 1,902 miles of common carrier product pipelines in nine states.
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 5.1% distribution. The Deutsche Bank price target is $51. The consensus target is $48.65. Shares closed most recently at $36.83.
Phillips 66 Partners
This is the other top pick solid sponsorship name to buy now at Deutsche Bank. Phillips 66 Partners L.P. (NYSE: PSXP) is a growth-oriented MLP formed by Phillips 66 to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids pipelines and terminals and other transportation and midstream assets.
The company recently declared a third-quarter 2015 cash distribution of $0.428 per common unit. The distribution represents an increase of 7% over the previous quarterly distribution of $0.40 per unit and a 35% increase over third-quarter 2014. This increase is consistent with previous guidance that the partnership expects a 30% compound annual distribution growth rate from the last quarter of 2013 through 2018 — the kind of consistent increases that Wall Street and investors applaud.
Unitholders receive a 2.9% distribution. The $80 Deutsche Bank price target is higher than the consensus target of $70.70. Shares closed Wednesday at $58.08.
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With strong sponsorships, and well thought out capital expenditure plans, these companies can fight their way through to better days and come out perhaps even stronger. The sector is still weak though, and these are more suitable for aggressive growth accounts.
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