Energy Business

Why Merrill Lynch Has Raised Targets on Many Top MLPs

The world of master limited partnerships (MLPs) saw its ground go from stable to shaky during the oil and gas meltdown from 2014 into 2016. Some MLPs have even found themselves entering 2016 in financially desperate situations. Some investors and analysts have decided that the weakness seen in the first six weeks of 2016 has left a lot of value and potential upside.

On March 7, Merrill Lynch raised its price objectives for a dozen or so MLPs. While some were smaller and lower in unit prices, other MLPs and MLP-like entities were among the top of their sector.

Merrill Lynch said in its report that the continued rebound in oil prices and the strength in fixed income markets both contributed to the recent MLP outperformance against the market — for a total return of 7.2% versus 2.7% for the S&P 500 in the prior week. This review is ahead of a key MLP bankruptcy hearing that could change how the market views many of the key MLP structures with their contracts and their partners.

Investors should take note that most MLPs and oil stocks were last seen on Tuesday giving back some of the recent big gains. That is a trend that may continue if the gains prove to have been too far ahead of the real news flow and if the oil recovery was more financially driven than fundamentally driven.

In the Merrill Lynch call, Buckeye Partners L.P. (NYSE: BPL) saw its price objective raised to $75 from $66. The firm noted that Buckeye currently trades at an approximate 12.8 times 2016 enterprise value/EBITDA multiple. This is a slight premium, but the firm sees Buckeye as having a lower business risk cash flow profile and a manageable balance sheet that culminate to meet steady demand for its refined products pipelines and terminals.

Another boost for Buckeye is that S&P recently raised its credit outlook to Stable from Negative. Merrill Lynch has a Buy rating, but its credit ratings are BBB- at S&P and Baa3 at Moody’s. The firm thinks this is a positive and is also in line with management’s commentary. The MLP is said to have over $900 million liquidity under its credit facility, and that will fund its full 2016 capital program without a forced capital raise.

Buckeye was last seen down 2.3% at $68.27, but the share price was under $60 as recently as February 24, 2016. Buckeye has an $8.85 billion market cap, a 52-week trading range of $47.07 to $82.98 and a consensus analyst price target of $71.08.

Since it changed back to a corporation, Kinder Morgan Inc. (NYSE: KMI) is no longer technically an MLP. Still, it is one of the kings of the sector, and many MLP closed-end funds still own Kinder Morgan shares (though ETFs are not generally holders). Merrill Lynch raised Kinder Morgan’s price objective to $19 from $18 due to higher sector valuations. The new $19 value is based on a target adjusted 2016 EV/EBITDA of 11.5.

Kinder Morgan shares were last seen down 4.5% at $17.93, after closing at $18.79, but it was under $14.00 as recently as February 11. The market cap is $40.7 billion, the consensus price target is $20.63 and the 52-week range is $11.20 to $44.71.

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