Why One Analyst Thinks This High-Yield MLP Has 50% Upside?

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With investors so concerned about the price of oil and natural gas, and concerned about the companies and entities which operate in energy, 24/7 Wall St. has kept a close eye on looking for opportunities and upside in the oil patch. A Master Limited Partnership (MLP) named NGL Energy Partners LP (NYSE: NGL) has sold off handily from its high — about 40% from the $46.25 peak over the last year. Now one analyst’s report, which came¬†after the entity’s guidance for 2015 and 2016, is calling for upside of roughly 50%.

Janney Capital Markets analyst Nathan Judge reiterated his Buy rating on NGL Energy Partners. He also has a $40 fair value estimate for the partnership’s units.

When NGL Energy Partners issued its 2015 and 2016 guidance, it offered adjusted EBITDA guidance for fiscal 2015 of $425 million or greater. It had previously offered adjusted EBITDA guidance in the range of $410 million to $425 million for the fiscal year ending March 31, 2015. In addition, NGL also increased its adjusted EBITDA guidance for fiscal 2016 to $500 million or greater — versus prior guidance of $485 million to $500 million.

On top of the 40% drop or so from the unit price peak last year, this is one of those partnerships that falls into the high-yield area with a distribution of almost 9%. As a reminder, those are ‘yield equivalent’ returns, because on top of income they also include a return of capital component in those distributions.

Janney Capital Markets based its call on this partnership unexpectedly raising guidance with the note that this supports its bullish thesis. Nathan Judge’s commentary showed that the firm was actually concerned about lower guidance rather than higher guidance. He said:

We are raising our estimates to reflect our greater optimism about the water services and crude logistics businesses. Overall, this is supportive of our thesis that the distribution will grow faster than consensus expects (10% vs consensus of 7%) over the next several years… Some investors have expressed concern that there would be a reduction to guidance. We would note that there has been a reduction to consensus DCF/U estimates of about 25% over the past 6 months. The bearish sentiment can be also seen in the 8% yield the units have currently vs the 6% yield for peers that are growing at a similar pace… We continue to believe NGL’s distribution growth will average about 10% annually for the next three years (consensus expects 7%) and the company’s guidance raise is supportive of our view.

Janney increased its EBITDA expectations, driven by increased optimism about the company’s water services and crude logistics businesses. Janney’s target of $40 is also the highest of all analysts which follow the partnership.

As far as other analyst calls on NGL, Barclays started coverage back at the end of March with an Equal-Weight rating and a $31 price target.

NGL Energy Partners saw its units trading up 1.25% at $27.80 in mid-Wednesday trading. The 52-week range is $22.57 to $46.25, and the consensus price target is listed as $35.44.

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