Will Rising Interest Rates and Falling Prices Have an Effect on MLPs?

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After underperforming the market last year, investors have received a catch-up trade with master limited partnerships (MLPs) delivering 31.11% in total returns over the past year, as measured by the market-cap weighted Alerian MLP index, and 31.9% in total return, as measured by the more equally weighted Cushing 30 MLP index. That compares to 28.35% for the S&P 500. The question for investors is whether this stellar performance can continue.

With the twin events of a rise in interest rates and a reduction in oil and natural gas prices having an impact on valuations across the sector, the MLP analysts at Deutsche Bank A.G. (NYSE: DB) continue to view the sector favorably because of its organic growth, rising dividends and distributions, and still historically low costs of capital. In a new report they examine not only rising rate scenarios, but the amount and structure of the debt that MLPs currently have. Specifically, they analyzed individual companies’ exposure to floating rate debt. Their conclusion points to still attractive fundamentals for their top stocks to buy.

Enterprise Products Partners L.P. (NYSE: EPD) still tops the list at Deutsche Bank. The partnership has returned 25.8% over the past 12 months. Analysts’ five-year annual growth estimate is 12.2%, the company’s price-to-earnings (P/E) ratio is 21.9 and its dividend-payout ratio is 93%. The Deutsche Bank price target is $70. The Thomson/First Call estimate is at $66. Unitholders receive a 4.30% distribution. Remember, MLP distributions may include return of principal.

Kinder Morgan Energy Partners L.P. (NYSE: KMP) is now part of the fourth largest energy company in the United States. Deutsche Bank has $102 price target on this industry giant. But the consensus target is lower at $91.50. Unitholders are paid a 5.90% distribution.

Plains All American Pipeline L.P. (NYSE: PAA) announced this week that it expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the second quarter of 2013 to exceed the midpoint of its quarterly guidance by approximately 10%. Deutsche Bank has placed a $66 target on this widely held name. The consensus is at $62.50. Unitholders receive a 3.90% distribution.

Western Gas Partners L.P. (NYSE: WES) has seen strong insider buying in May, with four executives purchasing stock. Deutsche Bank has a $70 price target, but the consensus is at $66. Unitholders are paid a 3.50% distribution.

Access Midstream Partners L.P. (NYSE: ACMP) had its initial public offering in the summer of 2010, and it focuses on long-term, fixed-fee contracts. The benefit of a fixed-fee revenue model is that there is no direct commodity price exposure and distributable cash flows are more stable. Deutsche Bank has a $57 price objective. The consensus estimate is at $47. Unitholders receive a 4.20% distribution.

Rose Rock Midstream L.P. (NYSE: RRMS) met first-quarter estimates on revenues and crushed expectations on earnings per share. Deutsche Bank has a $44 price target. The consensus for the stock is at $42. Unitholders are paid a 4.40% distribution.

Given the tremendous run the MLP stocks have had this year, investors need to be more selective. The Deutsche Bank analysts clearly are biased to the large diversified names, as opposed to the niche players, with a few exceptions. As we have suggested for some time, investors may want to buy partial positions now and wait for a market pullback to complete their positions.

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