4 High-Yielding Diversified Energy MLPs to Buy With Big Summer Potential

Energy

Published: May 23, 2017 10:05 am

Last Updated: January 12, 2020 11:45 am

With summer right around the corner, and the busy vacation driving season also set to start, some of the top firms on Wall Street are becoming more positive on the price of oil, especially after the black gold fought its way back over the psychological $50 per barrel price level. Despite rising U.S. supplies in recent months, the coming driving season is expected to help ease the glut, and with energy underperforming this year, the energy master limited partnerships (MLPs) look like a very good place to be.

In a new research report, JPMorgan remains positive on the larger diversified MLPs and the report noted this:

We maintain our positive view on the group given upside leverage to increasing domestic crude oil and natgas production, improved financial health, and strong diversification across the midstream value chain. Moreover, the group currently Offers an attractive 7%+ yield, notably more income than the 3.4%/4.0% yields Of Utilities and REITs.

Four diversified MLPs are rated Outperform at JPMorgan, and all look like good values for growth and income investors at current levels.

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. The company’s distribution coverage ratio is well above one times, making it a relatively less risky MLP. Its distributions have grown for several quarters, and last quarter Enterprise Products announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.415 per common unit, or $1.66 per unit on an annualized basis.

JPMorgan noted this in the report:

The company should benefit from the numerous projects placed into service recently and the upcoming ‘big five’ (Midland-Echo, PDH, Frac 9, Shin Oak, iBDH) projects. Moreover, the integrated value chain with high barriers to entry continues to spawn attractive downstream projects servicing growing petroleum/chemical needs and also stands to capitalize on Permian processing and oil/gas takeaway needs.

Investors receive a 6.07% distribution. The JPMorgan price target for the units is $33, and the Wall Street consensus target is $32.96. The stock closed Monday at $27.33.

Energy Transfer Partners

This stock was acquired by Sunoco Logistics Partners last year. 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 report noted:

With the dust settling post the merger with Sunoco Logistics (helps B/S & coverage post cut) and mega project execution derisking in the rear view mirror (Rover, DAPL), the company has passed crucial hurdles, which we believe the market fails to credit. We expect large size, diversification, vertical integration and contributions from high quality projects will benefit ETP. Execution remains the focus from here.

Unitholders receive a 9.14% distribution. JPMorgan has a $30 price target, close to the consensus target of $30.86. The stock closed Monday at $23.42.

MPLX

This company reported very solid numbers but 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 (NGLs); 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 analysts noted this:

We view MPLX’s current valuation as failing to credit the double-digit distribution growth guidance through 2018 (with a highly competitive growth rate for large cap MLPs thereafter), plus the strong embedded upside opportunity with an eventual recovery in Appalachia producer activity.

MPLX unitholders receive a 6.08% distribution. The $44 JPMorgan price target compares with a $43.33 consensus target. The stock closed Monday at $35.52.

Plains All American Pipeline

This is another of the top MLPs on Wall Street that had the power to withstand the downturn. Plains All American Pipeline L.P. (NYSE: PAA) owns and operates midstream energy infrastructure and provides logistics services for crude oil, NGLs, natural gas and refined products. It owns an extensive network of pipeline transportation, terminaling, storage and gathering assets in key crude oil and NGL-producing basins and transportation corridors and at major market hubs in the United States and Canada. On average, Plains All American handles over 4.1 million barrels per day of crude oil and NGL on its pipelines.

The company also has one of the largest storage asset bases, with over 120 million barrels of liquids storage capacity at three major hubs, which are located in Cushing, Oklahoma; Midland, Texas; and Patoka, Illinois.

Investors receive a 7.83% distribution. The JPMorgan price objective is $37. The posted consensus target is $32.76, and Monday’s closing price was $28.05.

These four companies pay way above average distributions, their shares are priced right and they offer investors some outstanding total return potential. Remember, MLP distributions can contain return of principal.

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