Energy Business

Why Credit Suisse MLP Downgrades Not as Bad as They Sound

The master limited partnerships (MLPs) have changed quite a bit from the peak days of the oil boom. Many MLPs saw their units surge for years as investors bought into the notion that the infrastructure and pipeline segments of energy could withstand the tests of time with the ups and downs of the oil and gas markets.

Credit Suisse had been one of the firms still willing to hold out hope for the MLPs. As of St. Patrick’s Day, that hope may have faded. Credit Suisse does still have a handful of MLP structures with Outperform ratings, but the firm’s John Edwards came out and downgraded 12 MLPs on March 17. Many of these MLPs are trading well below the target prices, and Credit Suisse is still calling for huge upside in some of the names.

What hurts here, at least on the surface, is that those downgrades include Enterprise Products Partners L.P. (NYSE: EPD) and former MLP of Kinder Morgan Inc. (NYSE: KMI), both being reduced to Neutral from Outperform.

On Enterprise, Edwards said that this MLP remains a bellwether in the space, but with a 6.5% yield and 32% total return outlook, he believes better value can found elsewhere in the near term (especially if crude finds a floor or corrects to the upside). Its target is $30. Enterprise Products units were up 3% at $25.40 on Thursday afternoon despite the downgrade, and its 52-week range is $19.00 to $34.73.

The Kinder Morgan call may be a formal downgrade, but there may be upside still as Credit Suisse raised its target to $22 from $20. Its shares have recovered well after the dividend cut, but they were last seen trading near its target EV/EBITDA and DCF multiples of 12x. Edwards sees limited upside to Kinder Morgan shares in the near term, although remaining constructive on the name. Kinder Morgan shares were last seen up 0.6% at $19.01 on Thursday after the downgrade, versus a 52-week range of $11.20 to $44.71.

In 2015 and 2016, many investors have had to get used to far worse metrics for MLPs. Many investors already had a hard time differentiating the difference between traditional dividends of common stocks and the distributions from MLPs. Now they have in many cases had to learn to deal with lower distributions, or in some cases almost no distributions.

There was just one upgrade of the entire MLP group. Edwards raised the rating on Enable Midstream Partners L.P. (NYSE: ENBL) to Outperform from Neutral. Edwards said that there is relative upside to the firm’s $11 target price and that Enable’s units appear oversold. How about this for a gain, up 13% at $7.80 versus a 52-week range of $5.38 to $18.09. Maybe the $11 target had something to do with it versus a $9.30 consensus price target.

Antero Midstream Partners L.P. (NYSE: AM) was downgraded to Neutral from Outperform. Its units have performed well in 2016 and the Credit Suisse $32 target price reflects 32% total return potential, below the median of Credit Suisse’s coverage universe.

EnLink Midstream LLC (NYSE: ENLC) was downgraded to Neutral from Outperform.

Enbridge Energy Partners L.P. (NYSE: EEP) was downgraded to Neutral from Outperform. Enbridge Energy is one in which coverage is expected to remain tight, even with flat distributions. The $24 target price indicates a total return of about 40% is near its sector midpoint.

Spectra Energy Partners L.P. (NYSE: SEP) was downgraded to Neutral from Outperform, and the target was cut to $54 from $56. The MLP remains a strong defensive name that should perform in line with its coverage if crude continues to recover.

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