Energy Business

Credit Suisse Mixed on MLPs for 2015, Maybe More Consolidation

Credit Suisse issued a report on the outlook for master limited partnerships (MLPs) in 2015. The brokerage firm expects that the total return outlook for the sector is roughly between 12% and 20% for 2015, which translates to a Market Weight rating with an upside bias. In turn, the firm expects the sector distribution growth range to be 5% to 8% and its target yield range to be 5.75% to 6%.

While there is at least some caution in MLPs due to the fallout from lower oil, it sets the stage for Kinder Morgan Inc. (NYSE: KMI) to perhaps make its largest in-class empire perhaps even larger.

In terms of the total return outlook, yields in 2015 are expected to be much higher compared to 2014, when yields fell within the range of 5.3% to 5.9%. So far, MLPs have recovered nearly half of the pullback since mid-December, and they are currently facing the lowest fractionation and processing spreads in at least five years. As a result, Credit Suisse rates the MLP sector at Market Perform with an upside bias.

The median sector growth for MLPs was 7.3%, and the average growth rate was 11% in the third quarter of 2014. Management teams are expected to be stingier with their distribution growth going forward, as a slowdown in cash flow is anticipated. Credit Suisse downgraded Access Midstream Partners L.P. (NYSE: ACMP) and Regency Energy Partners L.P. (NYSE: RGP) to Neutral from Outperform.

ALSO READ: Merrill Lynch’s Top MLP Picks for 2015

On a broad view, the analyst firm expects infrastructure spending to peak in 2015, and that more consolidation within the sector could accelerate in the same time. Specifically, capital spending is expected to be roughly $46 billion, based on current estimates from Credit Suisse. This would make it the fifth consecutive year of capex growth, implying a compound annual growth rate (CAGR) of 15% since 2007 pre-recession levels.

Higher spending in 2014 was accompanied by 19 IPOs, 53 follow-on offerings and nine other/secondary offerings. Roughly $28 billion of debt was raised and $29 billion of equity was issued, in line with 2014 levels. Looking ahead, 2015 could end up being the peak in the capex and build-out supercycle, with $90 billion a year less to reinvest in U.S. production growth as a result of what is expected to be a drop in oil prices in 2015.

Credit Suisse’s report commented on mergers and acquisitions, specifically Kinder Morgan:

With the big valuation hits that many names have taken through the latter part of 2014, more consolidation could accelerate in 2015 especially from the larger diversified names whose valuations have held up better. The closing of the Kinder Morgan transactions in November puts Kinder Morgan on the prowl for potential acquisition candidates, a considerably long list considering Kinder Morgan’s size and lower cost of capital.

Looking at the MLP index, we see that Alerian MLP ETF (NYSEMKT: AMLP) was down 2% at $17.29 in the second half of the trading day Monday, in a 52-week trading range of $16.01 to $19.35.

ALSO READ: Exxon or Chevron: Which Performs Better in 2015?

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