It has been no secret that the falling price of oil has taken its toll on the energy sector. Still, the drop may not be as universally bad as some of the trading in oil and gas giants and in segments such as master limited partnerships (MLPs) may indicate. A fresh report this week from Merrill Lynch’s MLP team actually highlights which MLPs may be mostly insulated from the carnage in oil prices. The caveat here should be obvious in that persistently lower prices may overshadow a group far longer than just a few trading sessions.
The Merrill Lynch commodity team recently lowered its West Texas Intermediate (WTI) average 2015 forecast to $84 per barrel — with Brent averaging $90 in 2015. Still, the team noted that $70 to $75 Brent could be the most likely scenario in 2015. A key observation is that oil under $80 per barrel is fine, but under $70 is less and is under its prior worst case scenario.
So, it turns out that large MLP players such as Kinder Morgan, Enterprise, Magellan Midstream, Buckeye, Plains All American and others could actually be partially insulated if Merrill Lynch is accurate in its assessment. The MLP call from Merrill Lynch signals that for the midstream MLP sector to find a true floor, crude oil markets would need to find a bottom and the latest moves have arguably been destabilizing. The firm is sticking by its prior call — not all MLPs are created equal.
Enterprise Products Partners
Enterprise Products Partners L.P. (NYSE: EPD) is considered to be a lower business risk MLP, owing to its large, diverse asset base and strong organic growth outlook. Downside risks to Merrill Lynch’s price objective are supply chain disruptions, the loss of key customers, a sustained period of low natural gas prices and a severe hurricane season. Any of these risks could negatively impact volumes at the company’s pipelines and storage facilities and demand for gathering, processing and storage of natural gas and natural gas liquids (NGLs).
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A high natural gas to crude oil ratio would negatively impact natural gas processing economics, leading to lower processed volumes of natural gas, lower NGL production and lower demand for Enterprise Products’ services and use of its facilities. From a macro perspective, risks are an increasing interest rate environment, the company’s need to externally finance growth initiatives since it distributes the bulk of its operating cash flow, and a stricter regulatory environment, which would increase operating and maintenance expenses. Furthermore, the tax treatment of Enterprise Products depends on its status as a partnership for federal income tax purposes: should it become subject to taxes, its performance could be materially affected.
Units of Enterprise Products closed Monday down over 2% at $36.32. Merrill Lynch has a price objective of $43 for the stock, compared to the consensus analyst price target of $43.74. It has a 52-week trading range of $15.19 to $41.38 and a market cap of almost $69 billion.
Kinder Morgan Inc. (NYSE: KMI) is now a corporation again rather than being the parent of three different MLP entities. We recently highlighted how funds and ETFs would treat Kinder Morgan after the merger. Merrill Lynch believes that Kinder Morgan faces some downside risks ranging from the pending merger falling through to unfavorable capital markets that could hinder Kinder Morgan’s ability to complete drop-downs. Other downside risks are a decline in crude oil production and potentially the pricing at Kinder Morgan Energy Partners’ CO2 segment, an outright decline in demand for refined products or natural gas, cost overruns at organic growth projects, an economic slowdown impacting energy demand and supply chain disruptions.
Shares of Kinder Morgan closed down about 1% at $40.81. Merrill Lynch has a price objective of $47 for the stock, compared to the consensus target of $44.38. The 52-week trading range is $30.81 to $42.49.
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Magellan Midstream Partners
Magellan Midstream Partners L.P. (NYSE: MMP) faces business risks to the price objective of a slowdown in refined products demand growth, cost inflation or timing delays at its expansion projects, and supply chain disruptions. This would negatively impact volumes transported through the company’s pipelines and stored at its terminal facilities. Also, margins could decline at Magellan Midstream Partners’ petroleum products blending business. However, this business should represent less than 15% of its ongoing operating margin. Upside risks are additional organic growth announcements and higher than expected distribution growth.
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