There are two things now that are keeping many energy and income investors from buying master limited partnerships (MLPs) at today’s bargain basement prices. The threat of them having to cut their distributions and the almost worst threat of them having to raise capital and add dilution into the mix.
A new report from Jefferies have found three top companies that may be outstanding buys for investors as they do not need to raise capital and could be somewhat insulated from further downward selling pressure. The segment and the energy sector in general are still under fire, but scaling in some capital to these solid companies could make sense at current levels. Remember that MLP distributions can contain return of capital.
This stock is a solid play on the propane industry. AmeriGas Partners L.P. (NYSE: APU) has the advantage of having a very large propane footprint. Propane usually trades at almost twice the price of spot natural gas. The consumer is often in a rural or outlying areas, and there is no major competition to speak of. AmeriGas operates as a retail and wholesale distributor of propane gas and related equipment and supplies in the United States. It serves approximately 2 million residential, commercial, industrial, agricultural, wholesale and motor fuel customers in 50 states through approximately 2,500 propane distribution locations.
The stock has been sold off pretty hard, and the Jefferies team sees this as very solid buying opportunity. They also point out that this company historically, even in good times, is not constantly going to the equity markets to raise capital and that is a big plus for unit-holders.
AmeriGas investors are paid a very rich 8.19% distribution. The Jefferies price objective is set at $53, and the Thomson/First Call consensus target is posted at $50. AmeriGas closed Thursday at $44.96.
Enterprise Products Partners
This company is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, just raised the distribution 1%. It maintains a very good long-term position in the market and provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.
One of the reasons why the analysts have a preference for the stock might be its outstanding distribution coverage ratio. The company’s distribution coverage ratio is well above one times, making it relatively less risky among MLPs. Investors view a favorable coverage ratio as greater than 1.3, as this indicates the business has ample cash to continue paying distributions to unit holders. The company’s distributions have grown for several quarters and are expected to continue in 2016.
Investors are paid very solid 5.85% distribution. The Jefferies price target is $36. The consensus target is higher at $38.70. Shares closed Thursday at $25.92.
Spectra Energy Partners
This company posted very solid earnings this week and looks to continue raising distributions. Spectra Energy Partners L.P. (NYSE: SEP) is one of the largest pipeline MLPs in the United States and connects growing supply areas to high-demand markets for natural gas, natural gas liquids and crude oil. These assets include more than 17,000 miles of transmission and gathering pipelines, approximately 170 billion cubic feet of natural gas storage, and approximately 4.8 million barrels of crude oil storage.
Along with the outstanding earnings posted this week, Spectra declared a quarterly cash distribution to unit-holders of $0.61375 per unit, an increase of $0.0125 over the previous level of $0.60125 per unit. This is the 31st consecutive quarter that Spectra Energy Partners has increased its quarterly cash distribution.
Spectra Energy investors are paid a very solid 5% distribution. The Jefferies price objective is $54, and the consensus target is higher at $56.20. The shares closed most recently at $48.87.
The Jefferies analysts have found three companies that could be outstanding additions to portfolios now. The last thing Wall Street wants to see from any MLPs now is a capital raise, because regardless of the need.