Combine a 40% decline in oil since the summer with portfolio managers rushing to get tax-loss selling done and off the books for 2014, and you have a very toxic combination for even the best energy master limited partnerships (MLPs). Over the past decade, the Alerian MLP Index (AMZ) has produced an average monthly return of 4.9% in January, versus just a 0.8% gain for the S&P 500 during the same time frame. A new research report from Merrill Lynch makes the case that this January’s returns for MLPs could be even better than normal due to the oversized selling and massive underperformance this year.
In the report, the Merrill Lynch team points out that sector laggards have a snapback ability in January because of huge tax-loss selling, zero buyers committing new funds at the end of the year in an ability to avoid a K-1 being generated and buyers stepping in before the MLPs go ex-distribution in February. They also point out that the prior two-month laggards historically have an even bigger January than the full-year laggards.
Here are four MLPs rated Buy that underperformed badly in November and December and could show big gains in January.
American Midstream Partners L.P. (NYSE: AMID) is down a gigantic 33% in the November to December period so far. It was formed to own, operate, develop and acquire a diversified portfolio of midstream energy assets. The partnership provides midstream services in the Texas, North Dakota, the Gulf Coast and Southeast regions of the United States. With a higher distribution rate, a positive mergers and acquisition environment and possible additional drop-downs from the general partner, the company has positives galore.
American Midstream investors are paid a 9.72% distribution, and we remind readers that MLP distributions can contain return of principal. The Merrill Lynch price target is $31, the same as the Thomson/First Call consensus price target. Shares closed Wednesday at $19.10.
Delek Logistics Partners L.P. (NYSE: DKL) is down a massive 26.5% in the past six weeks. The company owns and operates crude oil and refined products logistics and marketing assets in the United States. It operates through two segments: Pipelines and Transportation, and Wholesale Marketing and Terminalling. The company’s target distribution rate is toward the lower end of the Merrill Lynch range of sector target distribution rates, owing to fee-based contracts and minimum volume commitments that back the company assets.
Delek investors receive a 6.2% distribution. The Merrill Lynch price target is $45, while the consensus target is $43.17. Shares closed at $31.90.
Targa Resources Partners L.P. (NYSE: NGLS) is down a massive 26.4% since the first of November. The company is engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling natural gas liquids (NGLs) and NGL products; gathering, storing and terminalling crude oil; and storing, terminalling and selling refined petroleum products. Targa’s target yield is lower than the Merrill Lynch average MLP target yield, given its above peer average growth profile.
Targa investors are paid a 6.1% distribution. The Merrill Lynch price objective is $69, and the consensus target is $70.74. Targa closed Wednesday at $40.58.
Crestwood Equity Partners L.P. (NYSE: CEQP) is down a huge 25.6% since the start of November. The company owns the general partner interest, including the incentive distribution rights and an approximate 4% limited partner interest of Crestwood Midstream Partners. In addition, Crestwood Equity Partners’ operations include an NGL supply and logistics business that serves customers in the United States and Canada. Merrill Lynch feels that Crestwood’s s target distribution rate should trade relatively in line with midstream MLP and general partner peers.
Crestwood investors are paid a 7.7% distribution. The Merrill Lynch price target is $12, and the consensus figure is $12.13. Shares closed Wednesday at $5.91.
The Merrill Lynch team is avoiding the high-yield MLPs here, as many may be forced to slash distributions. If history is correct, all of these MLPs could show big outperformance starting in January.