Why Jefferies Upgraded 4 Top MLPs

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The Alerian MLP Index has dropped about 9% over the past 12 months, but as bad as that sounds, since June 21 the index has gained more than 6%. Is this the beginning of a recovery in interest in energy master limited partnerships (MLPs) or just a blip that will dribble away over the next several months?

Analysts at Jefferies see the glass as half full, noting a number of restructurings among midstream companies, strategic mergers, acquisitions and joint venture formations, and better profits forecast for the second half of the year. The analysts also see the MLPs breaking (or at least loosening) their ties to the price of crude:

We now incorporate strip pricing through 2019 and believe the ability of US [exploration & production companies] to demonstrate price-neutral profitability is key to breaking midstream equities’ tethering to crude prices.

The firm upgraded its rating on four MLPs: Targa Resources Corp. (NYSE: TRGP) was raised from Hold to Buy, as was Williams Partners L.P. (NYSE: WPZ). Both EnLink Midstream LLC (NYSE: ENLC) and Southwest Gas Holdings Inc. (NYSE: SWX) were raised from Underperform to Hold. Here’s a look at what the analysts had to say about each of these companies.

EnLink Midstream last month signed a long-term transportation agreement with ONEOK to move natural gas liquids (NGLs) from EnLink’s Oklahoma site to an EnLink’s platform at the Mont Belvieu trading and storage hub. EnLink’s stock has dropped 11% since the end of the first quarter, only slightly worse than the Alerian MLP Index, which Jefferies believes improves the outlook for a total return on the stock. The price target was lowered from $16 to $15, but the rating was raised from Underperform to Hold.

Southwest Gas recently completed a rate case in Arizona that includes an annual revenue increase of about $16 million and an annual depreciation reduction of about $45 million. The agreement also includes 9.5% return on equity, among other things. The company raised its quarterly dividend by 10% and Jefferies noted that Southwest’s target payout ratio is 55% to 60%. The analysts raised their price target from $68 to $70 and raised their rating from Underperform to Hold.

Targa Resources in May announced plans to build a new pipeline to move NGLs from the Permian Basin to Mont Belvieu. Initially the Grand Prix pipeline will transport 300,000 barrels a day but will be expandable to 550,000 barrels a day. A secondary offering of 17 million shares announced at the same time raised about $775 million to fund the company’s 2017 capital expenditure budget and costs relating to the new pipeline. Jefferies lowered its price target on the stock from $54 to $50 but raised its rating from Hold to Buy.

Williams Partners sold its 88.5% interest in the Geismar olefins facility for $2.1 billion in April and subsequently entered into long-term supply and transport agreements with the buyer to provide feedstock to the Geismar plant. At its analyst day meeting, the company noted that the majority of its planned $12 billion in growth projects is aimed at offshore projects that will all be joint ventures in an effort to keep the company from becoming overly dependent on the offshore market. Jefferies raised the company’s price target from $42 to $44 and raised the rating from Hold to Buy.

EnLink Midstream shares traded up about 2.8% in the noon hour Wednesday, at $17.75 in a 52-week range of $14.70 to $20.45. The consensus 12-month price target on the stock is $19.23. Its dividend yield is 5.75%.

Southwest Gas stock traded up 3.3%, at $76.76 in a 52-week range of $64.26 to $86.65. The consensus price target is $76.60. The dividend yield is 2.58%.

Targa Resources traded up 4.4% Wednesday to $45.80, in a 52-week range of $35.35 to $61.83. The consensus price target is $55.55. Targa’s dividend yield at the current share price is 7.95%.

Williams Partners traded up 1.4%, at $40.62 in a 52-week range of $32.93 to $42.32. The consensus price target is $55.00 and the dividend yield is 5.91%.