Energy

UBS Has 5 Most Preferred Energy MLPs With Big Upside Potential

Lee Jackson

Published: July 25, 2017 10:05 am

Last Updated: January 12, 2020 9:49 am

It’s becoming increasingly clear that the attempt by OPEC and the Russians to slow production has started to hit a wall, and with compliance at a six-month low in June, and American shale producers still operating at full speed, the black gold may be range bound. That said, energy is the only S&P sector that was down in the first half of 2017, so the value is enticing. The question is where to put investment chips now?

One outstanding area to pick may be the top energy master limited partnerships (MLPs), as while oil pricing is important, overall usage is as well. In a new research report, UBS thinks the second quarter may end up being the trough for the sector, and capital expenditure restraints put in as oil plunged through the last half of 2015 and early 2016 are surely helping now.

These five companies are among the firm’s most preferred stocks to own now, and all of them are rated Buy at UBS.

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 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. The distributions have grown for several quarters, and last quarter Enterprise Products Partners announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.42 per common unit, or $1.68 per unit on an annualized basis.

Enterprise Products Partners investors are paid a very solid 6.12% distribution. The UBS price target for the stock is $36, and the Wall Street consensus target is set at $32.73. The stock traded early Tuesday at $27.55 a share.

DCP Midstream Partners

This high-yielding company makes sense for accounts looking for income. DCP Midstream Partners L.P. (NYSE: DPM) is primarily engaged in natural gas gathering, processing, transportation and marketing, as well as transportation and marketing of natural gas liquids (NGLs) and wholesale distribution of propane in the northeastern and midwestern United States.

In January 2017, the company and its general partner, DCP Midstream LLC, announced a transaction combining all of the assets and debt at both entities. The transaction created one of the largest natural gas gathering and processing MLPs in the United States.

Investors in DCP Midstream Partners are paid an outstanding 9.04% distribution. UBS has $45 price target for the stock, and the posted consensus price objected is $40.36. The shares traded early Tuesday at $37.60.

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 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.

MPLX unitholders are paid a very solid 6.01% distribution. The $45 UBS price target compares with the consensus price target of $42.97 a share. The stock was changing hands at $35.85 early on Tuesday.

Energy Transfer Partners

This company merged with 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.

Energy Transfer unitholders are paid a massive 10.7% distribution. UBS has set its price target at $30 a share, while the consensus target price is $28.86. The shares traded early Monday at $20.20.

Targa Resources

This top energy MLP has had a string of positives lately. Targa Resources Corp (NYSE: TRGP) is a leading provider of midstream services and is one of the largest independent midstream energy companies in North America. Targa owns, operates, acquires and develops a diversified portfolio of complementary midstream energy assets.

The company is primarily engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling NGLs and NGL products, including services to liquefied petroleum gas (LPG) exporters; gathering, storing and terminaling crude oil; storing, terminaling and selling refined petroleum products.

Targa posted better quarterly numbers, and it closed a $1 billion private placement, which will save $80 million a year in interest costs, and finally closed the Targa Resources Partners deal. Jefferies expects the company can keep the current distribution through 2018.

Targa shareholders are paid a solid 7.86% distribution. The UBS price objective is $59. The consensus target price is at $54.48. The shares traded on Tuesday at $47.20 apiece.

While it is important to remember that MLP distribution can contain return of capital, these top companies remain solid picks in a low-yield environment, especially when you consider the underperformance of the energy sector during the first half of 2017.