Credit Suisse Highlights Margin Risks in NGL MLP's (DPM, TRGP, NGLS, AMJ, AMLP, KYN)

The world of the high-payout Master Limited Partnerships, or MLPs, has help up rather well against the drop in oil prices.  That should be somewhat expected since these are generally not directly tied to oil and gas prices.  What does have to occur though is that underlying energy demand has to remain high enough to be moved around throughout the infrastructure systems owned and operated by MLPs.

With the risk of the high payouts being able to grow and grow, investors have to pay close attention when research reports in the sector are released.  Credit Suisse issued a report on Thursday showing more risks growing for three of these MLPs.  The firm noted, “We are reducing our growth outlook for NGLS,TRGP & DPM due to what we believe may be sustained weakness in NGL prices and processing margins. We believe an NGL oversupply situation could emerge by the end of 2012 resulting in the weak prices/margins.”

Credit Suisse is maintaining outperform ratings on DCP Midstream Partners (NYSE: DPM), Targa Resources Corporation (NYSE: TRGP), and Targa Resources Partners LP (NYSE: NGLS).  It is unfortunately cutting its estimates and price targets.

On DCP Midstream Partners (NYSE: DPM)  The report noted, “Despite the recent commodity price weakness, DPM remains well positioned to deliver above average distribution growth over the medium term. The co. is in the early stages of a period of transformative growth which will result in over $2.5 billion of co-investment with its general partner over the next three years.” The payout yield-equivalent here on DCP Midstream is 6.75% based upon its last distribution. Credit Suisse cut the target to $49.00 from $54.00 before.

Targa Resources Corporation (NYSE: TRGP) operates through its general and limited partner interests in Targa Resources Partners LP (NYSE: NGLS).  On the company or corporation Credit Suisse noted, “Given an uncertain NGL pricing outlook beyond 2013, we believe distribution growth will likely slow at NGLS which will result in slower distribution growth at TRGP, as well. However, we are still forecasting robust dividend CAGR of ~19% down from our previous forecast in the mid 20%’s.”  On Targa Resources Partners LP (NYSE: NGLS) the report noted “We believe that NGL prices could likely remain under pressure due to a supply/demand imbalance which could emerge at the end of 2012 and last through 2015. Though NGLS has largely hedged its expected NGL exposure through 2013.”

The dividend on “TRGP” is only 3.3% and the move today is down 2.1% at $43.25; it has a 52-week range of $26.01 to $49.91. Credit Suisse cut the target to $57.00 from $59.00 before.

The payout yield-equivalent on the “NGLS” Targa is 6.75% and the move today is down 1.5% at $36.75 against its 52-week range of $28.83 to $45.42. Credit Suisse cut the target to $46.00 from $51.00 before.

Today’s report and the move downward against most commodities has shares of JPMorgan Alerian MLP Index ETN (AMEX: AMJ) down 0.2% at $36.80 and the ALPS Alerian MLP ETF (AMEX: AMLP) is down 0.2% at $15.76.  The closed-end fund of Kayne Anderson MLP Investment Company (NYSE: KYN) is actually up a penny at $30.17.

We would highlight that MLP payouts have continued to rise, but that does not eliminate the key risks we were monitoring in MLP payouts going into the hot summer.

JON C. OGG