5 Long-Term Opportunities Forming in MLPs

July 23, 2015 by Jon C. Ogg

The world of master limited partnerships (MLPs) has suffered handily along with the plunge in oil prices. What is interesting is that there seems to be a flush-out happening here, and it may be more driven by a very cautious or negative energy sector sentiment than it is based on underlying fundamentals.

Many of these MLPs have performed worse in 2015 than some of the actual oil-producing giants. The underlying thought during the run up of oil and the subsequent run down in oil was that the best-run MLPs were supposed to have at least a bit less commodity price sensitivity than the companies that produce oil.

MLPs have several issues to contend with at this time. On top of weak oil prices, there is a consolidation phase in which larger and better run MLPs are looking at gobbling up some of the weaker companies due to current industry woes. Then there is the access to the capital markets being less available, and of course the potential rise in interest rates has some investors wondering if they should be less focused on income. Another issue is that all the prior issues might make it harder to keep up those ever-growing distributions.

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24/7 Wall St. always enjoys looking for long-term value opportunities. Still, there could be additional weakness ahead. No investor or trader should consider MLPS, or any other asset class, being at a bottom or as being a quick-hit opportunity to pile in all at once just because of aggressive sell-offs. Imagine what might happen if the stock market were to roll over on top of the weakness seen here already. Or imagine what happens if the price of oil starts to consider $40 oil per barrel again.

24/7 Wall St. has featured two pure-play MLPs, one former MLP that turned back into a corporation, one MLP closed-end fund and one MLP exchange traded fund.

Enterprise Products Partners

Enterprise Products Partners L.P. (NYSE: EPD) is the current king of former MLP structures. It has been rolling up entities into its mix, but the deals has have so far been bolt-on rather than transformative or heavily leveraged. Enterprise has a distribution yield-equivalent of 5.3%.

The shares are trading right at about $27.75, down about 33% from the 52-week high. Its 200-day moving average now is above $31. Its 52-week high is $41.38, it has a market cap of $55 billion and its consensus price target is $39.83. This implies 43% upside if the analysts are correct.

Kinder Morgan

Kinder Morgan Inc. (NYSE: KMI) has slid with the MLP sector, and it recently raised its dividend yet again. Due to its consolidation back into a corporation rather than the corporation and an MLP structure, it is a real dividend for investors. Whether Kinder Morgan will be able to grow that dividend by 10% for each of the next five years remains to be seen and is partly dependent on the underlying price. Its yield is now 5.1%.

Kinder Morgan is trading right at $35.05, down over 20% from its 52-week high. The 200-day moving average is just above $40 now. With a 52-week range of $33.25 to $44.71, and a market cap of $75 billion, Kinder Morgan has a consensus price target of $46.82. If analysts are correct, there is an implied upside opportunity of 34%, without considering that yield.

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Plains All American Pipeline

Plains All American Pipeline L.P. (NYSE: PAA) has seen its units brutalized in the MLP sell-off, falling to $39.50, against a 52-week range of $38.56 to $61.09. It just recently hiked its quarterly cash distributions, the 43rd of the past 45 quarters to do so. The MLP also has a 6.9% yield-equivalent in its distribution.

Plains All American has a $15.7 billion market cap, and the current price of $39.50 compares to a 200-day moving average of $44.88. Its consensus price target is $56.30, representing implied upside of 42%, without considering the distribution.

Kayne Anderson MLP Investment

Kayne Anderson MLP Investment Co. (NYSE: KYN) is not an MLP itself, but it is a closed-end mutual fund that invests in and tracks MLPs. Like most MLP funds, it holds Kinder Morgan aggressively. Due to its price performance being in the tank with close to a $27.00 share price, the yield equivalent is now up to 8.2%.

The $27.00 share price is against a 52-week range of $26.82 to $41.35. Investors need to understand that there is some leverage in this closed-end fund, and that means that gains on the upside and price drops on the downside are magnified. That is why the year-to-date performance is almost -25%.

Alerian MLP ETF

The Alerian MLP ETF (NYSEMKT: AMLP) has suffered along with the MLPs as well, but this is the most liquid of the exchange traded funds that track the MLPs, and the dividend yield is supposed to be a bit more straightforward as well. That being said, the currently indicated yield of almost 7.5% fluctuates more than traditional MLPs due to the timing of payouts.

Trading at $14.98, the Alerian MLP has a 52-week range of $14.87 to $19.35. This fund is down almost 15% year to date.

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24/7 Wall St. has chosen to focus on those entities that can either hold their dividends and distributions steady or those that have demonstrated over and over (and said over and over) that they still expect to be able raise their payouts in the quarters or years ahead.

An additional risk has again been some future tax concerns. While the National Association of Publicly Traded Partnerships has diminished this risk in general, it did voice some concerns that may be an additional source of investor concern.

Trying to catch a falling knife can be very painful. The idea here is not to call a bottom as much as it is to highlight how much these have come down and how much they could rise if the current analyst expectations were to pan out. Looking for long-term value requires far more patience than the next few trading days.