Energy

Energy MLPs Up 50% From Lows: 4 That Remain Top Analyst Picks

Lee Jackson

Published: May 26, 2016 10:50 am

Last Updated: January 13, 2020 7:31 am

One almost shudders when thinking about how the energy master limited partnerships (MLPs) traded earlier this year. When 2016 started, the Alerian MLP index fell a stunning 30% in five short weeks as oil prices plummeted to the lowest levels in years. Since then, sentiment in the sector has improved, balance sheets have been cleaned up, the weak companies have been exposed and we have had a 50% bounce off the February 11 bottom. The question is, where do we go from here?

A new Deutsche Bank research report is cautiously optimistic on the second half of 2016, and there are areas the analysts continue to like. They caution that at current levels, we could be in for a sideways move as supply continues to even out. Four top companies are cited as the firm’s top picks. All are rated Buy at Deutsche Bank.

Enterprise Products Partners

This company is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Despite the energy slump, Enterprise Products Partners L.P. (NYSE: EPD) recently raised the distribution 1%. Enterprise Products 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 is 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 recently Enterprise Products increased the quarterly cash distribution paid to partners to $0.395 per common unit, or $1.58 per unit on an annualized basis.

This is the 56th distribution hike since Enterprise’s initial public offering in 1998. Also, this is the 47th time that the company has increased its quarterly payout. The distribution signifies a 5.3% increase over the distribution in the first quarter of 2015.

Enterprise investors receive a very solid 5.91% distribution. The Thomson/First Call consensus price target for the stock is $32.08. Shares closed Wednesday at $27.73.

Energy Transfer Partners

This stock has been mauled over the last year and is still offering investors a big distribution and a solid entry point. Energy Transfer Partners L.P. (NYSE: ETP) currently owns and operates approximately 35,000 miles of natural gas and natural gas liquids (NGLs) pipelines. It also owns 100% of Panhandle Eastern Pipe Line (the successor of Southern Union Company) and a 70% interest in Lone Star NGL, a joint venture that owns and operates natural gas liquids storage, fractionation and transportation assets.

Last November, Energy Transfer Partners and Sunoco announced the dropdown to Sunoco of the remaining 68.42% interest in Sunoco LLC and 100% interest in the legacy Sunoco retail business for approximately $2.226 billion. Sunoco is expected to pay to Energy Transfer Partners approximately $2.2 billion in cash (including the expected value of working capital) and also will issue approximately 5.7 million common units valued at approximately $194 million. This completes the $5.7 billion total retail business dropdown in just over a year.

Energy Transfer shareholders are paid a huge 11.60% distribution, which may be cut. The consensus price target is $39.87. Shares closed Wednesday at $36.68.
EQT Midstream Partners

This company has remained a top midstream play across Wall Street. EQT Midstream Partners L.P. (NYSE: EQM) is a growth-oriented partnership formed by EQT Corporation to own, operate, acquire and develop midstream assets in the Appalachian Basin. The partnership 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 company 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 at least the company was able to go to the capital market for additional funding and should be set for the foreseeable future. Deutsche Bank tem points out the numerous positives for the company, in addition to the fact that the shares have lacked some of the big moves other companies have made this year.

EQT investors are paid a 3.89% distribution. The consensus price target is $92.46. Shares closed most recently at $76.60.

MPLX

This company has reported very solid numbers and it may be more 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.

The company recently completed a massive $1 billion private placement that brings liquidity to the balance sheet. The funds will be used for capital expenditures, repayment of debt and general partnership purposes. MPLX had previously announced that the combination of some opportunistic equity issuances in the first quarter, and this private placement would provide for the partnership’s anticipated funding needs for the remainder of 2016 and into 2017.

MPLX unitholders receive a 6.07% distribution. The consensus price target is set at $36.50. Shares closed most recently at $33.29.

While the big money for this year has probably been made, investors looking to initiate or add to energy holdings may want to buy partial positions at current levels, and see if the markets don’t back up some as we head into what could be a very volatile summer.