Jefferies Says Top Midstream Energy MLPs Are Outstanding Buys Now

By Lee Jackson Updated Jul 14, 7:52AM EDT · Published Dec 24, 10:31AM EST

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Jefferies Says Top Midstream Energy MLPs Are Outstanding Buys Now — © Thinkstock

Needless to say, energy master limited partnerships (MLPs) trade in tandem with oil prices because they are in the oil and gas moving and storage business. However, they can still generate big revenue even when oil prices are lower. The massive decline in oil over the past 60 days has hammered the prices of the top companies in the sector, and with many analysts expecting the price of oil to go higher in 2019, they are offering outstanding yields and entry points.

In a new research report from Jefferies, the firm’s midstream analyst Chris Sighinolfi upgraded 10 top companies for 2019. He noted that the group is trading at stunning levels that are 15% to 30% below three-year averages on an enterprise value/EBITDA basis.

We screened the list for the companies that appear somewhat safer, with the higher distributions, and found four that look like great buys for accounts with a long-term perspective looking to add energy.

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DCP Midstream Partners

Shares of this high-yield company make sense for accounts looking for income. DCP Midstream Partners L.P. (NYSE: DCP ) is primarily engaged in natural gas gathering, processing, transportation and marketing, and transportation and marketing of natural gas liquids (NGLs), and wholesale distribution of propane in the Northeast and the Midwestern United States.

Almost two years ago, DCP’s predecessor, DPM, and its general partner, DCP Midstream, announced a transaction combining all the assets and debt at DCP Midstream with DPM. The transaction created one of the largest natural gas gathering and processing MLPs in the United States.

Investors are paid an 11.02% distribution. The Jefferies price target is set at $34, which compares with a much higher Wall Street consensus of $42.93. The shares ended Friday at $27.18.

EnLink Midstream

This stock has been pounded and offers a massive distribution for accounts looking for income. EnLink Midstream LLC (NYSE: ENLC) is a Texas-based energy midstream company that owns limited partner interest and the general partnership interest in EnLink Midstream Partners. EnLink is an MLP primarily engaged in the gathering, transmission, processing and marketing of natural gas and NGLs.

The company reported third-quarter 2018 adjusted EBITDA of $267 million, a 235% year-over-year gain, and a 4% gain over the previous quarter beating the consensus estimates of $262 million. The stock got hit back in November on news that its largest customer Devon plans to reduce the number of drilled wells per pad in Oklahoma’s STACK play.

Investors are paid a huge 13.57% distribution. The Jefferies price target is posted at $15, and the consensus price target is $17.42. The shares closed Friday at $11.22.

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 natural gas liquids and related products, including services to liquefied petroleum gas exporters; gathering, storing and terminaling crude oil; storing, terminaling and selling refined petroleum products.

Targa Resources has one of the premier asset positions in the Permian basin. With solid management, a strong balance sheet and attractive exposure to some of the most attractive U.S. energy basins, it remains a top pick across Wall Street.

Investors are paid a very nice 9.54% distribution. The Jefferies price objective is $51, while the consensus estimate is higher at $59.77. The shares closed Friday at $36.22.

Magellan Midstream Partners

This top midstream MLP company checks in high on a distribution list. Magellan Midstream Partners L.P. (NYSE: MMP) primarily transports, stores and distributes refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation’s refining capacity, and can store more than 95 million barrels of petroleum products, such as gasoline, diesel fuel and crude oil.

The company reported in November third-quarter 2018 adjusted EBITDA of $359 million, compared to the consensus estimates of $349 million. The company also announced an updated potential backlog to include a crude oil pipeline from Cushing to Houston, a crude pipeline from Houston to Corpus Christi, and an export terminal in Corpus Christi capable of servicing very large crude carriers.

Magellan investors are paid a 6.98% distribution. The Jefferies price target is posted at $65, and the consensus price target for the stock is $73.75. Shares closed trading last Friday at $56.03.

While most exploration and production stocks have been hammered beyond recognition, the midstream companies have held up much better. All of these companies offer investors cheap valuations and the best entry points in years.

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About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.