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Oil Poised to Stay Over $100 a Barrel: 5 MLPs With Generous Dividends
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Despite the shock of war, the situation in Ukraine eventually will be sorted out. And despite the potential for closure there, many across Wall Street feel that will not end the supply-demand situation around the world for oil. The energy business has been a boom and bust industry for decades, and the United States was net importer of oil for years until the shale boom turned the tables. In November 2019, the United States became a net exporter of all oil products, including both refined petroleum products and crude oil. By 2021, the United States was the world’s largest producer.
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The current administration, and many others around the world, are adamantly opposed to fossil fuels. Many of the big producers, sensing ESG (environmental, social and governance) pressures, decided to focus on free cash flow and returning profits to shareholders via dividends and stock buybacks, instead of increasing production.
It is estimated that the world consumes over 97 million barrels of oil per day. Despite electric vehicles and an increase in renewables, that number likely will not decline for years. But production has, and in a simple supply and demand scenario, at least for the foreseeable future, demand will exceed supply and many across Wall Street and the sector feel that oil could hover around the $100 and higher a barrel level for some time.
For investors looking to benefit from higher oil prices, but acknowledging the massive run energy stocks have had over the past year, the energy master limited partnerships (MLPs) may provide exposure to the sector and some rich distributions. We screened our 24/7 Wall St. energy research database and found five companies with Buy-rated stocks that pay investors handsomely. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Energy Transfer
This 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.
This publicly traded limited partnership has core operations that include complimentary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids (NGLs) and refined product transportation and terminaling assets; NGL fractionation; and various acquisition and marketing assets.
After the purchase of Enable Partners last December, Energy Transfer now owns and operates more than 114,000 miles of pipelines and related assets in all the major U.S. producing regions and markets across 41 states, further solidifying its leadership position in the midstream sector.
The completion of the transaction was immediately accretive to Energy Transfer and furthers Energy Transfer’s deleveraging efforts. It also adds significant fee-based cash flows from fixed-fee contracts. Additionally, the combined operations of the two companies is expected to generate annual run-rate cost and efficiency synergies of more than $100 million, excluding potential financial and commercial synergies.
Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG, 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.
Energy Transfer stock investors receive a 7.15% distribution. Wells Fargo has a $15 price target, while the consensus target is $14.61. The shares closed on Friday at $9.49 a share.
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Enterprise Products Partners
This is the largest publicly traded energy partnership and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, NGL fractionation, import and export terminaling, and offshore production platform services.
One reason many analysts may have a liking for the stock might be its distribution coverage ratio. This ratio is well above 1 times, making it relatively less risky among the MLPs.
Investors receive a 7.71% distribution. The Goldman Sachs price target on Enterprise Products Partners stock is $30. The consensus target is $29.10, and shares closed at $24.13 on Friday.
24/7 Wall St.Magellan Midstream Partners
This is another top midstream MLP company that checks in high on the distribution list. Magellan Midstream Partners L.P. (NYSE: MMP) engages in the transportation, storage and distribution of refined petroleum products and crude oil in the United States.
The company operates refined products pipelines that transport gasoline, diesel fuel, aviation fuel, kerosene and heating oil to refiners, wholesalers, retailers, traders, railroads, airlines and regional farm cooperatives, as well as to end markets, including retail gasoline stations, truck stops, farm cooperatives, railroad fueling depots, military bases and commercial airports.
The company also provides pipeline capacity and tank storage services, as well as terminaling, ethanol and biodiesel unloading and loading, additive injection, custom blending, laboratory testing and data services to shippers. In addition, Magellan Midstream Partners owns and operates crude oil pipelines and storage facilities as well as marine terminals located along coastal waterways that provide distribution, storage, blending, inventory management and additive injection services for refiners, marketers, traders and other end users of petroleum products.
Investors receive an 8.76% distribution. The $51 Raymond James price target is less than the $52.83 consensus target. Friday’s final Magellan Midstream Partners stock trade was at $47.36 a share.
MPLX
This is the top holding for the Alerian MLP energy exchange-traded fund. MPLX L.P. (NYSE: MPLX) is primarily engaged in crude oil and refined products transportation and terminaling in the U.S. Midwest and Gulf Coast regions, as well as natural gas gathering and processing in the northeast from its prior acquisition of MarkWest Energy in 2015. MPLX was formed by independent U.S. refiner Marathon Petroleum.
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The company’s assets include a network of crude oil and refined product pipelines; an inland marine business; light-product terminals; storage caverns; refinery tanks, docks, loading racks and associated piping; and crude and light-product marine terminals. It also owns crude oil and natural gas gathering systems and pipelines, as well as natural gas and NGL processing and fractionation facilities in key U.S. supply basins.
Investors receive an 8.90% distribution. BofA Securities has set a $43 price target. That $37.20 consensus target for MPLX stock is closer to Friday’s closing price of $31.68.
Sunoco
This well-known company could be the best buy for investors who are more conservative. Sunoco L.P. (NYSE: SUN) distributes and retails motor fuels in the United States. The company operates in two segments.
The Fuel Distribution and Marketing segment purchases motor fuel from independent refiners and oil companies and supplies it to independently operated dealer stations, distributors and other consumers of motor fuel, and partnership operated stations, as well as to commission agent locations.
The All Other segment operates retail stores that offer motor fuel, merchandise, foodservice and other services that include credit card processing, car washes, lottery, automated teller machines, money orders, prepaid phone cards and wireless services. It also leases and subleases real estate properties and operates terminal facilities on the Hawaiian Islands. As of December 31, 2020, the company operated 78 retail stores in Hawaii and New Jersey.
Investors receive an 8.01% distribution. The Sunoco stock price target at Citigroup is $49. The consensus target is $45.50, and the closing share price on Friday was $41.21.
These top companies all offer reasonably safe and reliable distributions, and they are major players in the energy infrastructure arena. Those looking for solid total return potential can do well owning these MLP leaders. It is important to note that MLP distributions may contain return of principal. Those looking to avoid the pesky K-1s can always purchase shares in the ALPS Alerian MLP exchange-traded fund. Such investors receive a 1099 instead of a K-1.
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