While it seems hardly possible if you live in the southern United States, winter is just around the corner up north. If the Farmer’s Almanac is correct, it could be another very nasty one. With that in mind, one of the best ways to play not only cold weather, but the growing demand around the world for natural gas, is to look for the top master limited partnership (MLP) leaders in the industry.
In a new research report, the natural gas team at Jefferies point out the natural gas rig count stayed static as many exploration and production companies were more focused on oil and liquids. In fact, the July average monthly rig count of 314 was one of the lowest monthly averages in more than 20 years. What this means to investors is supply should not overwhelm demand, and push prices substantially lower.
24/7 Wall St. has screened the Jefferies list of top natural gas MLPs for those with the best upside potential and the top yield. We like to remind readers that MLPs pay investors distributions, not dividends. Often the distribution can contain return of principal.
AmeriGas Partners L.P. (NYSE: APU) has the advantage of having a large propane footprint. Propane usually trades at almost twice the price of spot natural gas. The consumer is often in a more rural or outlying area, and there is no major competition to speak of. AmeriGas operates as a retail and wholesale distributor of propane gas and related equipment and supplies in the United States. It serves approximately 2 million residential, commercial, industrial, agricultural, wholesale and motor fuel customers in 50 states through approximately 2,500 propane distribution locations.
AmeriGas investors are paid an outstanding 7.6% distribution. The Jefferies price target for the stock is $52. The Thomson/First Call consensus target is $47.14. Shares closed trading on Tuesday at $45.83.
DCP Midstream Partners L.P. (NYSE: DPM) is midstream MLP engaged in the business of gathering, compressing, treating, processing, transporting, storing and selling natural gas; producing, fractionating, transporting, storing and selling natural gas liquids (NGLs) and recovering and selling condensate; and transporting, storing and selling propane in wholesale markets.
Investors are paid a very solid 5.6% distribution. The Jefferies price target is posted at $63, and the consensus stands at $59.73. DCP closed Tuesday at $53.48.
ONEOK Partners L.P. (NYSE: OKS) is another quality MLP touted by the Jefferies team. In the second quarter, the company’s distribution coverage ratio — distributable cash flows divided by distributed cash flows — was 1.02 times. A distribution coverage ratio over one indicates safety for distributions and distribution growth and also indicates cash availability to fund growth projects. This is a telltale indicator for more conservative MLP investors.
ONEOK investors are paid a very nice 5.4% distribution. Jefferies puts a $64 price target on the stock, while the consensus target is $61.27. Units closed trading on Tuesday at $54.92.
Williams Companies Inc. (NYSE: WMB) is one of the leading energy infrastructure companies in North America. It owns controlling interests in both Williams Partners L.P. and Access Midstream Partners L.P. through its ownership of 100% of the general partner of each partnership. Additionally, Williams owns approximately 66% and 50% of the limited partner units of Williams Partners and Access Midstream Partners, respectively. This provides investors with diversity in strategy and location that some other companies don’t.
Investors are paid a respectable 4% distribution. The Jefferies price target is $56, and the consensus target is much higher at $64.79. Williams closed trading on Tuesday at $54.
Despite an overall weak energy tape recently, investors looking for exposure to the sector and solid income should consider these top Jefferies picks. Most are very suitable for more conservative growth and income portfolios.