Investors in the energy master limited partnership (MLP) space have done very well over the past two years as interest rates have remained low, making yields attractive, and the price of oil has consistently been over $100 for West Texas Intermediate (WTI). In fact a year ago WTI was trading at $108 a barrel, but it closed Friday at $93.07. Great for all of us who have to fill up, not so good for stocks in the energy patch.
In a new report from the MLP team at UBS, while they acknowledge that pricing has slipped dramatically and the busy summer travel season is over, they stay positive on their top picks, which all sport sizable yields and outstanding growth potential.
Here are the three top MLP picks from UBS with among the highest yields. It is important to remember that MLP distributions can contain return of principal.
Energy Transfer Partners L.P. (NYSE: ETP) is engaged in the natural gas midstream and intrastate transportation and storage businesses in the United States. The company’s Midstream segment gathers, compresses, treats, blends, processes and markets natural gas in the major basins and shales in the United States, including the Permian Basin in West Texas. It has approximately 7,800 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas.
Investors are paid a very solid 6.25% distribution. The UBS price target for this top MLP is $65, and the Thomson/First Call consensus target is at $64. The stock closed Friday at $60.93, which is actually close to a 52-week high.
Memorial Production Partners L.P. (NASDAQ: MEMP) is a newer name to the MLP game, having gone public in 2011. With a strong acquisition track record, high reserve-to-production ratio, affiliation with a drop-down sponsor and a solid coverage ratio providing headroom to improve future distributions, the UBS analysts believe the trading multiple should move in line with the sector, resulting in attractive returns from near-term potential upside.
Investors receive a massive 9.7% distribution. The UBS price objective for the stock $26, and the consensus target is posted at $25.20. Shares ended trading last Friday at $22.70.
Regency Energy Partners L.P. (NYSE: RGP) is a midstream operator of natural gas pipelines, gathering systems and processing facilities. Regency’s midstream services are spread out across the country, and are focused on some of the highest-producing natural gas regions of the country, including the Marcellus and Haynesville shales.
Investors are paid a very nice 6.05% distribution. The UBS price target is posted at $35, and the consensus target is set at $34.22. The stock closed on Friday at $32.55 a share.
Interest rates will go higher eventually, and oil and gas price will stay volatile. The good thing for investors is that MLP stocks are more in the moving and storage business. Any sort of domestic and international growth in 2015 will put a solid base under energy pricing, and that should prove to be a positive overall for the industry.