If any sector has taken a beating this year, it is the master limited partnerships (MLPs). In what can only be described as an investor’s nightmare, the Alerian MLP index is down an astonishing 27%, versus a 4% decline in the S&P 500. In a new and very somber research report, Oppenheimer sees no “salvation” in the near term for the sector and thinks that the “lower for longer” mantra is probably correct.
One interesting part in the report is where Oppenheimer actually upgrades some of the high-yielding MLPs and notes that the large diversified companies are decent values at current trading levels. The analysts have picked companies they feel can sustain current distribution payments and even possibly raise them.
Oppenheimer currently has five MLPs rated Outperform, and here we focus on the two recently upgraded companies. Also we like to remind our readers that MLP distributions can contain return of capital.
Enbridge Energy Partners
This is one of the stocks upgraded to Outperform, and it could be a consistent winner for investors in the years to come. Enbridge Energy Partners L.P. (NYSE: EEP) owns and operates a diversified portfolio of crude oil and, through its interests in Midcoast Operating, natural gas transportation systems in the United States. Its principal crude oil system is the largest pipeline transporter of growing oil production from western Canada and the North Dakota Bakken formation. The system’s deliveries to refining centers and connected carriers in the United States account for approximately 17% of total U.S. oil imports.
The company’s Midcoast Partners natural gas gathering, treating, processing and transmission assets, which are principally located onshore in the active U.S. Mid-Continent and Gulf Coast areas, deliver approximately 2.2 billion cubic feet of natural gas daily.
Deutsche Bank sees the distribution backed by high-quality, fee-backed assets, and the firm forecasts a very sustainable one times distribution coverage through next year. Enbridge investors are paid an 8.45% distribution.
The Oppenheimer price target for the stock is $34, and the Thomson/First Call consensus target is $36.64. Shares ended trading on Thursday at $27.79.
Energy Transfer Partners
This stock has been absolutely mauled but is also upgraded to Outperform at Oppenheimer. Energy Transfer Partners L.P. (NYSE: ETP) currently owns and operates approximately 35,000 miles of natural gas and natural gas liquids pipelines. It also owns 100% of Panhandle Eastern Pipe Line (the successor of Southern Union) and a 70% interest in Lone Star NGL, a joint venture that owns and operates natural gas liquids storage, fractionation and transportation assets.
Sunoco is another affiliate of the company and purchased eight Pico convenience stores this year in South Central Texas. Sunoco is another MLP, which mainly supplies motor fuel to independent dealers, stores, distributors and commercial customers. Apart from its distribution business, the partnership also involves the operation of retail fuel units and 150 convenience stores.
Energy Transfer Partners sits almost 33% lower in price since last November, is trading with a substantial yield and may have the potential for high single digit distribution growth the next few years. The Oppenheimer team sees purchase of the company’s shares as an outstanding income-oriented asset in which the market has already priced in the low-growth scenarios.
Energy Transfer shareholders are paid an outstanding 9.13% distribution. The Oppenheimer price target is set at $54, though the consensus target is higher at $62.58. Shares closed most recently at $45.48.
While the worst may be over, the future is hardly sparkling. However, for patient long-term investors, these two companies may provide solid distributions during the wait for a rebound in energy pricing.