While the Federal Reserve declined to raise rates last week, the writing is starting to be on the proverbial wall. The fact that three Fed governors dissented, and the employment picture is much better than even this time last year, is starting to make additional moves higher inevitable. The question for many investors who have purchased higher yielding bond proxies like utilities, real estate investment trusts (REITs) and energy master limited partnerships (MLPs) is what sector will act the best when rates do tick higher.
A new RBC research report makes that case that energy MLPs have generally outperformed both utilities and REITs in a rising rate environment. It also points out that commodity pricing for crude oil is much more likely to drive overall MLP share prices than rate increases.
We screened the RBC MLP research universe looking for companies rated Outperform and those with the highest total return potential. We found four that make good sense for investors now and all are on the firm’s preferred picks for the week list.
Enterprise Products Partners
This company is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Despite the energy slump, Enterprise Products Partners L.P. (NYSE: EPD) recently raised the distribution 1%. Enterprise Products maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.
Top analysts remain positive on the rest of 2016 and into next year as volume headwinds for the company are lowered as new projects come online. They cite the commercial operations at the company’s ethane export facility, and two gas processing plants in the Permian as the big contributors. RBC points to the company’s above-average distribution coverage, strong liquidity and project backlogs as positives.
Investors receive a 5.9% distribution. The RBC price target for the stock is $34, and the Wall Street consensus target is $32.50. The stock closed Monday at $27.12.
Energy Transfer Partners
This stock is still offering investors a top quality distribution and entry point. Energy Transfer Partners L.P (NYSE: ETP) engages in the natural gas midstream and intrastate transportation and storage businesses in the United States.
The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas, and through ET fuel system and HPL system. It owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas. Its Interstate Transportation and Storage segment provides natural gas transportation and storage services; owns and operates approximately 12,300 miles of interstate natural gas pipeline; and has interests in various natural gas pipelines.
The Midstream segment gathers, compresses, treats, blends, processes and markets natural gas. It owns and operates 35,000 miles of in service natural gas, 31 natural gas processing plants, 21 natural gas treating facilities and four natural gas conditioning facilities.
The Liquids Transportation and Services segment transports mixed natural gas liquids (NGLs) and other hydrocarbons; stores mixed NGLs, NGL products and petrochemical products; and separates mixed NGL streams into purity products. It owns and operates various NGL pipelines and NGL storage facilities with aggregate storage capacity of approximately 51 million barrels. Its Investment in Sunoco Logistics segment gathers, purchases, markets and sells crude oil, and it owns and operates 1,800 miles of refined products pipelines.
Energy Transfer investors receive a huge 11.3% distribution. The $48 RBC price target compares with the consensus target of $45.82. The stock closed Monday at $37.37.