With the new decade off and running, and the stock market trading at some of the highest levels ever from a metrics standpoint, the search for relative value is on. One of the areas that may hold the most value is the energy master limited partnerships (MLPs), a group that sputtered badly in 2019. Despite a solid fourth-quarter rally, the NYSE Alerian MLP index is still down 6.5% over the past 12 months, compared too double-digit gains for all the major indices.
While still out of favor, the top energy MLPs may hold not only good upside value and potential but also may be the ticket for dependable income for investors with sticker shock over what many income investments pay now. In a new research report, Raymond James has a fourth-quarter earnings preview that highlights the firm’s top stocks to buy. The report noted this when discussing the state of the sector now:
Equities were bifurcated in both the fourth quarter of 2019 (weakness through Thanksgiving, followed by a healthy rebound) and early first quarter 2020 (geopolitical ebbs and flows). The group still trades at a high single-digit historical Enterprise Value/EBITDA discount and a large historical yield discount, opportunities still exist. Moreover, we see 2020 updates as a platform for management teams to acknowledge now well-known/ understood investor concerns. While defensive in 2020, steady execution could set up for a more optimistic 2021.
We screened the Raymond James MLP coverage universe for the companies rated Strong Buy. We then screened for the highest yielding and found four that may be outstanding additions for 2020 and beyond.
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Crestwood Equity Partners
This perhaps lesser known company has big upside to the Raymond James price target. Crestwood Equity Partners L.P. (NYSE: CEQP) provides infrastructure solutions to liquids-rich natural gas and crude oil shale plays in the United States. It operates through three segments.
The Gathering and Processing segment offers gathering and transportation services for natural gas, crude oil and produced water, as well as processing, treating and compression services.
The Storage and Transportation segment provides crude oil and natural gas storage and transportation services to producers, utilities and other customers. The Marketing, Supply and Logistics segment offers natural gas liquid (NGL) and crude oil storage, as well as marketing and transportation services to producers, refiners, marketers and other customers.
Crestwood Equity Partners investors receive a solid 7.6% distribution. Raymond James has a tall $42 price target on the stock, and that compares to the lower consensus target on Wall Street of $40.25. The shares were last seen trading on Wednesday at $32.79, up over 2% on the day.
Energy Transfer
The top MLP is a very safe way for investors looking for energy exposure and income. Energy Transfer L.P. (NYSE: ET) owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint in all the major domestic production basins.
The company is a publicly traded limited partnership with core operations that include complimentary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, NGLs and refined product transportation and terminaling assets; NGL fractionation; and various acquisition and marketing assets.
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Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG Company, as well as the general partner interests, the incentive distribution rights and 28.5 million common units of Sunoco, and the general partner interests and 39.7 million common units of USA Compression Partners.
Investors in Energy Transfer receive an outstanding 9.04% distribution Raymond James has a $20 price objective, while the posted consensus figure was last seen at $19.81. The shares closed trading at $13.50 apiece on Wednesday.
Plains All American Pipeline
This remains a top MLP pick across Wall Street. Plains All American Pipeline L.P. (NYSE: PAA | PAA Price Prediction) is primarily engaged in midstream crude oil activities, including transportation, gathering, marketing and terminaling.
Top analysts including the Raymond James team feel the company deserves a premium valuation given its leverage to the Permian and attractive organic growth backlog. The company 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 more than 6 million barrels per day of crude oil and NGL in its Transportation segment.
Plains All American Pipeline offers investors a dependable 7.68% distribution. The $25 Raymond James price objective is above the $23.68 consensus target price. The stock closed most recently at $18.74 a share.
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Targa Resources
This top energy midstream company actually is structured as a C-corp, and it has had a string of positives lately. Targa Resources Corp (NYSE: TRGP) is a leading provider of midstream services and 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 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.
Targa Resources investors are paid a massive 8.92% distribution. Raymond James has set its price objective at $48. The posted consensus target price is lower at $44.05, and the shares closed on Wednesday at $40.83.
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Needless to say, the mere suggestion of MLPs strikes some as a very contrarian idea, but the lower interest rates go, the more income-oriented and income-starved investors may start looking at them again. With oil appearing to be range-bound in the $50s to $60s per barrel, this could be a solid total return play, and prices remain at big discounts to historic norms.
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