3 MLPs to Buy That Have Already Reaffirmed 2016 Distribution Outlooks
One of the concerns for energy master limited partnership (MLP) investors is that many are having to cut distributions to shore up faltering balance sheets. With the equity and debt markets all but shut to only the biggest of the industry players, sometimes a cut is the only way out. In a new research report from RBC, they analysts make the case that distribution cuts should be used only as a last resort as other options do exist.
In the report, the RBC team noted that four companies have already reaffirmed their distribution outlooks for the entire year of 2016. We cross-referenced those companies against the RBC research universe of MLPs, and found three that were rated Outperform. It’s important to remember that MLP distributions may contain return of principal.
Magellan Midstream Partners
This is a top midstream company that checks in high on distribution list. Magellan Midstream Partners L.P. (NYSE: MMP) primarily transports, stores and distributes refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation’s refining capacity, and it can store more than 95 million barrels of petroleum products such as gasoline, diesel fuel and crude oil.
Magellan Midstream Partners sports a BBB+ credit rating from S&P and the outlook is listed as stable. One of the main reasons for the very positive ratings is that almost 85% of the company’s operating margin is protected by long-term, fixed-fee contracts. That means that its cash flow is not just recurring and highly predictable, but also largely immune from energy prices. This helps to keep the distribution safer.
Investors in Magellan Midstream Partners are paid a 5.3% distribution. The RBC price objective for the stock is $84, while the Thomson/First Call consensus price target is set at $75.15. The stock closed trading on Friday at $59.33 per share.
NGL Energy Partners
This smaller cap company could offer investors solid distribution and big price upside. NGL Energy Partners L.P. (NYSE: NGL) engages in the crude oil logistics, water solutions, liquids, retail propane and refined products and renewables businesses in the United States.
The Crude Oil Logistics segment purchases crude oil from producers and transports it for resale at pipeline injection points, storage terminals, barge loading facilities, rail facilities, refineries and other trade hubs. The Water Solutions segment is involved in the treatment and disposal of wastewater generated from crude oil and natural gas production operations; sale of recycled water and recovered hydrocarbons; and disposal of solids, such as tank bottoms and drilling fluids. The Liquids segment supplies propane, butane and natural gas liquids to retailers, wholesalers, refiners and petrochemical plants in the United States and Canada.
NGL Energy Partners also has a retail propane segment that sells propane, distillates and equipment to end users, consisting of residential, agricultural, commercial and industrial customers, as well as resellers. The Refined Products and Renewables segment markets gasoline, diesel, ethanol and biodiesel products; refined products terminaling services; and own refined products storage facilities.
The company announced in January that it entered an agreement with Arclight Capital Partners to sell TransMontaigne G.P. for $350 million. TransMontaigne G.P. is a wholly owned subsidiary of NGL Energy Partners, and it holds the general partner and incentive distribution rights to TransMontaigne Partners (TLP). NGL Energy Partners would continue to hold TLP’s marketing business and 3.2 million common units.
NGL Energy Partners investors are paid a huge 39.45% distribution, which translates to $0.64 and which the company reaffirmed in January. The RBC price target is a monster $18, the same as the consensus price objective. Shares ended last Friday’s trading at $6.49 apiece.
Rose Rock Midstream
This is a very small cap company that could provide huge total return potential. Rose Rock Midstream L.P. (NYSE: RRMS) owns, operates, develops and acquires a portfolio of midstream energy assets. The company gathers, transports, stores, distributes and markets crude oil in Colorado, Kansas, Louisiana, Montana, New Mexico, North Dakota, Ohio, Oklahoma, Texas and Wyoming.
Rose Rock Midstream owns and operates 31 crude oil storage tanks in Cushing with an aggregate storage capacity of approximately 7.6 million barrels; a 570-mile crude oil gathering and transportation pipeline system with approximately 630,000 barrels of associated storage capacity in Kansas and Northern Oklahoma; and a fleet of 255 transport trucks and 275 trailers for transportation of crude oil.
The company also owns and operates a 16-lane crude oil truck unloading facility with 230,000 barrels of associated storage capacity in Platteville, Colo,; a 17-mile crude oil pipeline that connects its Platteville, Colo., crude oil terminal to the Tampa, Colo., crude oil market; and approximately 61,800 barrels of crude oil storage capacity in Trenton and Stanley, N.D. In addition, the company has interests in a 527-mile pipeline that transports crude oil from Platteville, Colo., to Cushing, Okla.; and a 215-mile crude oil pipeline from western and north-central Oklahoma to Cushing. It serves crude oil traders and pipeline companies.
This is another company with a gigantic distribution that was reaffirmed in January, and it actually increased. Rose Rock Midstream investors are paid a stunning 35.68% distribution. The RBC price target for the stock is $15, though the consensus target price is higher at $18.22. The shares closed last Friday at $7.40 apiece.
While it is possible that these companies could do an about face and cut or even eliminate their distributions, such a huge change would evaporate credibility, which could be almost impossible to restore. For more aggressive accounts, these could prove to be total return gems.