The plunge in energy prices had been a welcome relief to consumers, but for shareholders of energy companies, it has been a debacle. The energy master limited partnership (MLP) space has been absolutely eviscerated. Since August 29, the correction in the MLP stocks has reached record levels, dropping 15.4% in six short weeks, putting it as one of the worst on record with only two larger pullbacks during the 2008 to 2009 financial crisis.
The analysts at Credit Suisse point out that it stings even worse for investors because as a general rule, MLP stocks have a very low actual correlation to oil prices. In fact, the correlation between crude and MLPs is lower than crude against broader averages such as the S&P 500 Total Return Index, the Utilities Index and the S&P Energy Index.
While the near-term remains cloudy, the long-term picture for investors is incredibly positive and supportive of growth and distributions. While cutting some of their price targets due to the depth of the sell-off, the Credit Suisse team keeps a rating of Outperform on five stocks that ranks among the highest quality or highest yielding in the space. The positive Credit Suisse stance is timely, as we asked the same question yesterday.
EV Energy Partners L.P. (NASDAQ: EVEP) is an oil and gas upstream formed in September 2006 with a geographically diverse asset base with properties in the Barnett Shale, the Appalachian Basin, Mid-Continent and the Permian Basin. While the Credit Suisse teams lowers their distribution growth level for the stock, they see possible catalysts ahead and the fact that the company is weighted more toward natural gas as a positive.
Investors are paid a large 10.44% distribution. The Credit Suisse price target is $40. The Thomson/First Call consensus target is higher at $43. Shares closed Tuesday at $29.60. It is important to remember that MLPs pay distributions and not dividends. The distributions may include return of principal.
Kinder Morgan Inc. (NYSE: KMI) is a top MLP pick at Credit Suisse and is also one of the most recommended MLPs on Wall Street. The company recently announced it will acquire all of Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners in a series of transactions. The merger plan is comprised of $40 billion in parent-company equity, $4 billion in cash and $27 billion in assumed debt. Some shareholders are opposed to the move, but many on Wall Street see it as a brilliant move.
Kinder Morgan unitholders are paid a solid 4.8% distribution. The Credit Suisse price target for the iconic industry giant is $49, and the consensus target is lower at $43.85. Shares closed Tuesday at $34.50.
Linn Energy LLC (NASDAQ: LINE) is a somewhat controversial name, rated Outperform, that could bring investors big returns. With the class action suit against the company dismissed back in the summer, much of the headline risk overhang has diminished. The company announced earlier this year the acquisition of $2.3 billion worth of natural gas heavy assets from Oklahoma-based energy producer Devon Energy. The deal includes the acquisition of five U.S. operating areas of Devon Energy and is very significant.
Linn investors are paid a gigantic 11.80% distribution. Credit Suisse has a $31 price target, and the consensus is higher at $33.50. The stock closed Tuesday at $22.90.
Plains All American Pipeline L.P. (NYSE: PAA) is another top MLP stock that remains a top pick at Credit Suisse and most of the Wall Street firms we cover. The company has decided to invest $120 million in two projects in the Eagle Ford area. The company is completing a new NGL fractionator, which will be in La Salle County, Texas. Natural gas liquids (NGL) will be sourced from the company’s Eagle Ford-producing region and will be processed and fractionated. This project, designed to fractionate up to 15,000 barrels of NGL per day, is expected to be operational by the second quarter of 2015. The company also announced last week a distribution increase.
Investors are paid a 4.8% distribution. Credit Suisse has a $67 price target, while the consensus is at $64.38. The stock closed Tuesday at $50.89.
QR Energy L.P. (NYSE: QRE) is still on tap be to be acquired, but the Credit Suisse team thinks there is an outside chance the deal is voted down. Breitburn and QR Energy entered into a definitive merger agreement, pursuant to which Breitburn will acquire QR Energy in a unit-for-unit exchange implying a transaction value of approximately $3.0 billion, including QR Energy’s existing net debt and outstanding Class C Convertible Preferred Units. This combination will result in Breitburn becoming the largest, oil-weighted upstream oil and gas MLP with a pro forma enterprise value of approximately $7.8 billion and current average daily production of approximately 57,300 boe per day.
QR Energy investors are paid a huge 12.9% distribution. The Credit Suisse price target is $20, and the consensus is slightly higher at $21.56. QR closed Tuesday at 13.21.
While there is always the risk that higher yielding MLPs will be forced to cut their distributions, the Credit Suisse analysts have done an outstanding job at focusing on names where the likelihood of such a cut is low. With the ability to add two of the industry’s top stocks and the high-yielding thoroughbreds at huge discounts, long-term investors have a chance now to make a potential killing in the MLP space.