4 MLPs to Buy That Should Do Fine When Rates Inevitably Go Higher

Energy

Published: September 27, 2016 10:10 am

Last Updated: January 13, 2020 3:06 am

While the Federal Reserve declined to raise rates last week, the writing is starting to be on the proverbial wall. The fact that three Fed governors dissented, and the employment picture is much better than even this time last year, is starting to make additional moves higher inevitable. The question for many investors who have purchased higher yielding bond proxies like utilities, real estate investment trusts (REITs) and energy master limited partnerships (MLPs) is what sector will act the best when rates do tick higher.

A new RBC research report makes that case that energy MLPs have generally outperformed both utilities and REITs in a rising rate environment. It also points out that commodity pricing for crude oil is much more likely to drive overall MLP share prices than rate increases.

We screened the RBC MLP research universe looking for companies rated Outperform and those with the highest total return potential. We found four that make good sense for investors now and all are on the firm’s preferred picks for the week list.

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.

Top analysts remain positive on the rest of 2016 and into next year as volume headwinds for the company are lowered as new projects come online. They cite the commercial operations at the company’s ethane export facility, and two gas processing plants in the Permian as the big contributors. RBC points to the company’s above-average distribution coverage, strong liquidity and project backlogs as positives.

Investors receive a 5.9% distribution. The RBC price target for the stock is $34, and the Wall Street consensus target is $32.50. The stock closed Monday at $27.12.

Energy Transfer Partners

This stock is still offering investors a top quality distribution and entry point. Energy Transfer Partners L.P (NYSE: ETP) engages in the natural gas midstream and intrastate transportation and storage businesses in the United States.

The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas, and through ET fuel system and HPL system. It owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas. Its Interstate Transportation and Storage segment provides natural gas transportation and storage services; owns and operates approximately 12,300 miles of interstate natural gas pipeline; and has interests in various natural gas pipelines.

The Midstream segment gathers, compresses, treats, blends, processes and markets natural gas. It owns and operates 35,000 miles of in service natural gas, 31 natural gas processing plants, 21 natural gas treating facilities and four natural gas conditioning facilities.

The Liquids Transportation and Services segment transports mixed natural gas liquids (NGLs) and other hydrocarbons; stores mixed NGLs, NGL products and petrochemical products; and separates mixed NGL streams into purity products. It owns and operates various NGL pipelines and NGL storage facilities with aggregate storage capacity of approximately 51 million barrels. Its Investment in Sunoco Logistics segment gathers, purchases, markets and sells crude oil, and it owns and operates 1,800 miles of refined products pipelines.

Energy Transfer investors receive a huge 11.3% distribution. The $48 RBC price target compares with the consensus target of $45.82. The stock closed Monday at $37.37.

Phillips 66 Partners

This is a top pick solid sponsorship name to buy now at RBC and may be one of the best total return plays for investors. 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 products and natural gas liquids pipelines and terminals and other transportation and midstream assets.

Top Wall Street analysts and the RBC team like the company and the current entry point, and they consider it a best-in-class drop-down story. Earlier this year the company announced it will buy a pipeline and the remaining 75% interest in other assets from Phillips 66 in a $775 million deal. The Houston-based partnership funded the deal with a combination of newly issued units to Phillips 66 and the assumption of notes payable to Phillips 66.

The analysts noted this is their report:

Drop Down acquisitions provide several years of visibility into the company’s cash flow growth potential (we estimate 5-year distribution compounded-annual-growth-rate of 18%), The company generates most of its revenues from fee-based activities, which minimizes direct commodity price exposure and its contracts with its sponsor have minimum volume commitments.

Investors receive a 4.21% distribution. RBC has a whopping $75 price target. The consensus price objective is $71.67. The stock closed Monday at $47.88.

Summit Midstream Partners

This company has hit our insider buying screens a total of 15 times since the beginning of the year. Summit Midstream Partners L.P. (NYSE: SMLP) focuses on owning, developing and operating midstream energy infrastructure assets primarily shale formations in North America. The company provides natural gas gathering, treating and processing services pursuant to primarily long-term and fee-based gathering and processing agreements with customers and counterparties in five unconventional resource basins.

Since going public in 2012, the company has continued increasing its distribution by 44% as the result of a number of acquisitions and investments that grew its footprint across most of the major shale plays. In addition, as mentioned, , all year long the company has seen extensive insider buying that started way back at the lows in January and February.

Investors are paid a 10.12% distribution. The RBC price target is $28. The consensus target is $24.42, and Summit closed Monday at $22.95.

Needless to say, a big oil sell-off like we saw last year could turn these stocks lower, but higher interest rates shouldn’t weigh that hard on them. However, with prices firming, and looking like they can hold current levels, all these companies look solid. While better suited for more aggressive income accounts, it is important to remember that MLP distributions can contain return of capital.