While many can argue about the use of oil and natural gas versus renewable sources, the reality is that the internal combustion engine and natural-gas-fired power plants will not be going anywhere any time soon. Both Brent and West Texas Intermediate crude have traded sideways to down for months and may be on the verge of a big summertime break-out to higher levels. While it is unlikely oil will hit the $120 a barrel mark as it did last summer, it is a good bet that both benchmarks will trade higher soon.
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Income investors looking to the energy sector, which was the only one to outperform in 2022, are often drawn to the energy master limited partnerships (MLPs) and with good reason. While they do tend to trade higher when the crude benchmarks do, their services to transport and store oil and gas are contract based, regardless of commodity pricing.
Oil sold off recently on the bank liquidity and contagion issues, and with China demand looking poised to explode later in the year, investors who step in now could be in for some sizable total return potential with the top MLPs. Goldman Sachs sees Brent at $95 by the end of 2023 and $100 in 2024. That means that now is the time to grab these top stocks before a rally in the second half of the year.
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We screened our 24/7 Wall St. MLP research universe and found five Buy-rated stocks paying huge distributions that look like outstanding ideas now. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Alliance Resource Partners
This is a leader in the thermal coal business and also offers solid diversity. Alliance Resource Partners L.P. (NASDAQ: ARLP), a diversified natural resource company, produces and markets coal primarily to utilities and industrial users in the United States. The company produces a range of thermal and metallurgical coal with sulfur and heat contents.
It operates seven underground mining complexes in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia. In addition, it leases land and operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. It buys and resells coal, as well as owns mineral and royalty interests in approximately 1.5 million gross acres of oil and gas producing regions primarily in the Permian, Anadarko and Williston Basins.
Further, the company offers various mining technology products and services, including data network, communication and tracking systems, mining proximity detection systems, industrial collision avoidance systems and data and analytics software.
Investors receive a 14.65% distribution. Benchmark has a $28 target price on Alliance Resource Partners stock. The consensus target is $29.33, and Tuesday’s final trade was for $18.90 a share.
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Energy Transfer
This top MLP is a very safe way for investors looking for energy exposure and income. Energy Transfer L.P. (NYSE: ET | ET Price Prediction) 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.
Energy Transfer is a publicly traded limited partnership with 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.
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After the purchase of Enable Partners last December, Energy Transfer 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.
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, as well as the general partner interests and 39.7 million common units of USA Compression Partners.
Investors receive a 10.00% distribution. Morgan Stanley’s price target is set at $17. Energy Transfer stock has a consensus target of $16.93. The shares closed on Tuesday at $12.50.
Hess Midstream
This is the limited partnership midstream arm of one of the country’s top energy companies. Hess Midstream L.P. (NYSE: HESM) owns, develops, operates and acquires midstream assets. The company operates through three segments.
The Gathering segment owns natural gas gathering and crude oil gathering systems, as well as produced water gathering and disposal facilities. Its gathering system consists of approximately 1,350 miles of high- and low-pressure natural gas and natural gas liquids gathering pipelines with capacity of approximately 450 million cubic feet per day, and the crude oil gathering system comprises approximately 550 miles of crude oil gathering pipelines.
The Processing and Storage segment comprises Tioga Gas Plant, a natural gas processing and fractionation plant located in Tioga, North Dakota; a 50% interest in the Little Missouri 4 gas processing plant located in south of the Missouri River in McKenzie County, North Dakota; and Mentor Storage Terminal, a propane storage cavern and rail, and truck loading and unloading facility located in Mentor, Minnesota.
The Terminaling and Export segment owns Ramberg terminal facility; Tioga rail terminal; and crude oil rail cars, as well as Johnson’s Corner Header System, a crude oil pipeline header system.
Hess Midstream stock investors receive an 8.05% distribution. The $35 Raymond James price target compares with a $33.80 consensus target and Tuesday’s close at $28.42.
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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.
MPLX’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 a 9.15% distribution. The J.P. Morgan price target is $41, while the consensus target is $39.42. On Tuesday, MPLX stock closed at $34.00 a share.
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Plains All American Pipeline
This remains one of the top MLP picks across Wall Street. Plains All American Pipeline L.P. (NYSE: PAA) engages in the pipeline transportation, terminaling, storage and gathering of crude oil and NGLs in the United States and Canada. The company operates through two segments.
Its Crude Oil segment offers gathering and transporting of crude oil through pipelines, gathering systems, trucks and at times on barges or railcars. This segment provides terminaling, storage and other facilities-related services, as well as merchant activities.
The Natural Gas Liquids segment provides gathering, fractionation, storage, transportation and terminaling activities. This segment is also involved in ethane, propane, normal butane, iso-butane and natural gasoline, as well as crude oil refining processes.
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The company posted solid results last week that topped Wall Street estimates, and it reaffirmed its guidance for 2023.
Investors receive an 8.45% dividend. Plains All American Pipeline stock has a Strong Buy rating at Raymond James. The firm’s $17 target price is higher than the $15.31 consensus target and Tuesday’s closing trade at $12.66.
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These five top companies offer reasonably safe and reliable distributions, and they are major players in the energy infrastructure arena. Investors 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 ETF. Investors receive a Form 1099 instead of a K-1.
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