Energy Business

Why Credit Suisse Says Go Long High-Quality Drop-Down MLPs Now

If any sector has taken a beating since West Texas Intermediate crude oil peaked in July of 2014, it has been the energy master limited partnerships (MLPs). In fact, the Alerian MLP Index has dropped a stunning 36% since it peaked in August of 2014, and many investors trying to catch the proverbial falling knife have taken a beating as well. A new research report from Credit Suisse maintains that one group of MLPs has outperformed during the drop, and investors should look at buying them now.

The Credit Suisse team points out that during the same period that the Alerian index was getting pounded, to the tune of 36%, the drop-down MLPs only declined 17%. These are energy companies that periodically “drop down” midstream assets like pipelines and such to their MLPs.

With new coverage on board, Credit Suisse is recommending investors buy the top companies now. We highlight two top picks and two with the best distributions. Credit Suisse cites that when spreads widen to more than 700 basis points, or 7% from the 10-year U.S. Treasury bond, which happened in the last week in September, and has only 3% of the time in the past 22 years, and spreads remain above 550 basis points, gains are positive 100% of the time. The current spread is 572 basis points.

EQT Midstream Partners

This company is a top pick now at Credit Suisse. EQT Midstream Partners L.P. (NYSE: EQM) is a growth-oriented partnership formed by EQT Corp. to own, operate, acquire and develop midstream assets in the Appalachian Basin. The partnership provides midstream services to EQT and third-party companies through its strategically located transmission, storage and gathering systems that service the Marcellus and Utica regions. The partnership also owns 700 miles and operates an additional 200 miles of FERC-regulated interstate pipelines, and it also owns more than 1,600 miles of high-pressure and low-pressure gathering lines.

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The company posted solid earnings across the board last week, and earnings growth from operating margin improvements, as well as one-time items, helped to solidly hold up the top and bottom line.

EQT investors are paid a 3.97% distribution. The Credit Suisse price target is an eye-popping $109. The Thomson/First Call consensus price target is $100.33. Shares closed Tuesday at $67.93.