Energy Business

Analysts Pick MLPs Insulated From Low Oil Prices

The tax treatment of Magellan Midstream depends on its status as a partnership for federal income tax purposes. Should Magellan Midstream Partners become subject to taxes, its performance could be materially affected. From a macro perspective, financial risks are rising interest rates, which would be negative for MLP valuations in general, a stricter regulatory environment that would increase operating and maintenance expenses, and the need for the company to turn to the capital markets to finance growth initiatives since the partnership distributes the bulk of its operating cash flow.

Units of Magellan Midstream closed down Monday about 4.5% at $79.13. Merrill Lynch has a price objective of $90 and the consensus target is $90.81. It has a 52-week trading range of $58.11 to $90.08 and a market cap of almost $18 billion.

Buckeye Partners

Buckeye Partners L.P. (NYSE: BPL) is considered a relatively low business risk MLP, owing to its negligible commodity price sensitivity, investment grade credit rating and modest organic growth outlook. Upside risks: more BORCO, Perth Amboy and HES terminal expansions, and improvement at Merchant Services. Downside risks to Merrill Lynch’s price objective are a slowdown in refined products demand growth, an outright decline in demand, higher prices, cost inflation or timing delays at Buckeye’s expansion projects and supply chain disruptions.

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This would negatively impact volumes transported through Buckeye’s pipelines and stored at its facilities. Buckeye’s tax treatment depends on its status as a partnership for federal income tax purposes. Should the company become subject to taxes, its performance could be materially affected. From a macro perspective, financial risks are rising interest rates, which Merrill Lynch believes would be negative for MLP valuations in general.

Units of Buckeye Partners closed Monday down 2.6% at $74.85. Merrill Lynch has a price objective of $86, and the consensus price target is $83.61. The 52-week trading range is $63.77 to $85.14 and the market cap is $9 billion.

Energy Transfer Partners

Energy Transfer Partners L.P. (NYSE: ETP) could experience some yield compression, given its resumption to distribution growth, robust organic growth backlog and interest in other Energy Transfer entities. The company’s target distribution rate is in-line with other large cap MLPs under coverage. Business risks to the price objective on Energy Transfer Partners are execution risk around integrating acquisitions, lower-than-expected returns on growth projects, a sustained decrease in natural gas commodity prices or lower basis differentials. Increasing costs may also reduce the returns realized on the company’s growth projects.

Units of Energy Transfer Partners closed Monday down over 4% at $62.43. Merrill Lynch has a price objective of $80 for the stock, compared to the consensus analyst price target of $72.92. It has a 52-week trading range of $51.65 to $69.66 and a market cap of $22 billion.

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Plains All American Pipeline

Plains All American Pipeline L.P. (NYSE: PAA) is another MLP considered a lower-risk business as a result of its diverse asset base, investment grade balance sheet, low direct commodity sensitivity, seasoned management team and solid organic growth outlook. Business risks to the price objective are a decrease in crude oil price volatility, a decrease in domestic crude oil supply, an outright decline in demand due to higher prices, economic slowdown or other reasons, and supply chain disruptions. This would negatively affect volumes transported through the company’s pipelines and stored at its facilities.

Cost inflation and project timing delays are also potential risks to the partnership’s capital spending program, as several other expansion projects are competing with Plains All American for labor and materials. The tax treatment of the company depends on its status as a partnership for federal income tax purposes. Should PAA become subject to taxes, its performance could be materially affected. From a macro perspective, financial risks are rising interest rates, which would be negative for MLP valuations in general, and a stricter regulatory environment, which would increase operating and maintenance expenses.

Units of PAA were closed down over 3% at $49.72 on Monday. Merrill Lynch has a price objective of $61, compared to the consensus price target of $63.76. PAA has a 52-week trading range of $46.63 to $61.09 and a market cap of $18 billion.

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As a reminder, the Merrill Lynch views were aimed at covering the more insulated MLPs against lower oil prices. They addressed dozens of companies, and our focus was on the larger MLPs and the MLPs that the firm had better things to say about compared to most. If oil keeps heading lower, it will be a tide that pulls all energy-related ships out to sea.

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