The question everybody continues to ask on Wall Street is pretty simple: Have we seen the bottom for oil and energy stocks, and have they finally turned? The answer is pretty elusive, but if the sector manages another positive week this week, and oil breaks the long downtrend line, at the very least, the worst may be over.
In a new research report, RBC remains partial to the energy master limited partnerships (MLPs) that have the best balance sheets and distribution coverage. The firm also likes the companies with outsized exposure to the Permian Basin, SCOOP or the Dry Utica. The analysts have eight preferred picks to buy this week, and we screened for the three with credit quality and solid distributions.
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 why many analysts may like the 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 they are expected to continue to do so 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 very solid 6.48% distribution. The RBC price target is $34. The Thomson/First Call consensus target is lower at $32.17. Shares closed Friday at $24.08.
Spectra Energy Partners
This company has posted very solid earnings and looks to continue raising distributions. Spectra Energy Partners L.P. (NYSE: SEP) is one of the largest pipeline MLPs in the United States and connects growing supply areas to high-demand markets for natural gas, natural gas liquids (NGLs) and crude oil. These assets include more than 17,000 miles of transmission and gathering pipelines, approximately 170 billion cubic feet of natural gas storage and approximately 4.8 million barrels of crude oil storage.
The stock is also investment grade rated BBB and stable, and RBC cites the company’s long term, take-or-pay contracts and a robust project backlog with high credit quality counterparties. This offers investors a company with very visible cash flow growth with minimal direct or indirect commodity price exposure. That is almost the ideal situation with the pricing still highly volatile.
Spectra Energy investors receive a 5.39% distribution. RBC has a $58 price target, and the consensus target is $53.20. The shares closed Friday at $46.50.
Western Gas Partners
This is another defensive play with a great balance sheet and limited commodity price risk. Western Gas Partners L.P. (NYSE: WES) is a growth-oriented MLP formed by Anadarko Petroleum to acquire, own, develop and operate midstream energy assets. With 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.
RBC is partial to the company. It sees very solid growth potential and cites the very strong positioning the in the D.J. and Delaware basins. The company recently announced it will acquire a 100% interest in Springfield Pipeline from Anadarko Petroleum for $750.0 million. Springfield’s sole asset is a 50.1% interest in the Springfield oil and gas gathering system, which gathers Anadarko’s and its partners’ Eagleford shale production in South Texas.
Western Gas shareholders receive an outstanding 7.71% distribution. The RBC price objective is $58, and the consensus target is $51.59. Shares closed Friday at $41.52.
Investors need to remember that MLP distributions may contain return of capital. The RBC picks offer a higher degree of safety and make sense for accounts looking to add energy exposure, but wanting to remain with more conservative plays.
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