Back in January, some of the more bearish voices on Wall Street were calling for oil to hit $20, and while it never dropped that low, trading toward the mid-$20s certainly was a gut check for many investors. While oil has rallied at one point over 50% from those lows, the Alerian master limited partners (MLP) energy index is still down 6.5% year to date, and investors looking to add shares should continue to think quality.
In a new research report, while RBC remains cautiously optimistic for the long term, it is clear that the analysts don’t have a big appetite for the lower quality companies, and with good reason. With counterparty credit risk a growing issue, RBC is focused on the quality companies with strong balance sheets and diverse business units not totally dominated by the price of crude.
We screened the RBC universe of MLPs and found four that are outstanding, and all are rated Outperform.
Energy Transfer Partners
This stock has been mauled over the past year and still offers investors a top quality distribution and entry point. Energy Transfer Partners L.P (NYSE: ETP) currently owns and operates approximately 35,000 miles of natural gas and natural gas liquids (NGLs) pipelines. It also owns 100% of Panhandle Eastern Pipe Line (the successor of Southern Union Company) and a 70% interest in Lone Star NGL, a joint venture that owns and operates natural gas liquids storage, fractionation and transportation assets.
Last November, Energy Transfer Partners and Sunoco announced the dropdown to Sunoco of the remaining 68.42% interest in Sunoco LLC and 100% interest in the legacy Sunoco retail business for approximately $2.226 billion. Sunoco is expected to pay to Energy Transfer Partners approximately $2.2 billion in cash (including the expected value of working capital) and also will issue approximately 5.7 million common units valued at approximately $194 million. This completes the $5.7 billion total retail business dropdown in just over a year.
Energy Transfer shareholders receive a huge 13.35% distribution, that may have to be cut. The RBC price target on the stock is $33, but the Thomson/First Call consensus target is at $41.29. Shares closed Friday at $31.60.
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Magellan Midstream Partners
This top midstream company 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 can store more than 95 million barrels of petroleum products, such as gasoline, diesel fuel and crude oil.
The company sports a BBB+ credit rating from S&P, and the outlook is listed as stable. One main reason for the very positive ratings is that almost 85% of Magellan Midstream’s operating margin is protected by long-term, fixed-fee contracts, meaning that its cash flow is not just recurring but is highly predictable and also largely immune from energy prices. This helps to keep the distribution safer.
Magellan investors receive a 4.67% distribution. The $84 RBC price objective is higher than the consensus price target of $76.31. Shares closed Friday at $67.26.
Genesis Energy
This is another top company that has fought its way through the sector trouble. Genesis Energy L.P. (NYSE: GEL) operates in the midstream segment of the oil and gas industry in the Gulf Coast region of the United States. Its Onshore Pipeline Transportation segment transports crude oil and carbon dioxide.
The midstream segment owns four onshore crude oil pipeline systems with approximately 500 miles of pipe located primarily in Alabama, Florida, Louisiana, Mississippi and Texas, as well as CO2 pipelines with approximately 270 miles of pipe. The Offshore Pipeline Transportation segment transports crude oil and owns various offshore crude oil pipeline systems, with approximately 1,200 miles of pipe located offshore in the Gulf of Mexico.
The company’s Refinery Services segment processes high-sulfur gas streams to remove sulfur for refineries. This segment provides services to 10 refining operations located primarily in Texas, Louisiana, Arkansas, Oklahoma and Utah, and it sells the by-product sodium hydrosulfide and caustic soda to industrial and commercial companies involved in the mining of copper, molybdenum and other base metals, as well as in the production of pulp and paper.
The Marine Transportation segment offers waterborne transportation of petroleum products and crude oil in North America. This segment owns fleet of 71 barges, with a combined transportation capacity of 2.6 million barrels, and 33 push/tow boats.
The Supply and Logistics segment provides services primarily to Gulf Coast oil and gas producers and refineries through a combination of purchasing, transporting, storing, blending and marketing of crude oil and refined products, such as fuel oil, asphalt and other heavy refined products. This segment operates a suite of approximately 300 trucks, 400 trailers, 562 rail cars and terminals and tankage with 2.9 million barrels of storage capacity in various locations along the Gulf Coast.
Genesis shareholders receive an 8.52% distribution. The RBC price target of $38 is right in line with the $38.17 consensus price objective. The shares ended last week at $30.72.
Tallgrass Energy Partners
This one rounds out the four picks and also offers investors a solid and well-covered distribution. Tallgrass Energy Partners L.P. (NYSE: TEP) provides crude oil transportation to customers in Wyoming, Colorado and the surrounding regions through Pony Express, which owns the Pony Express System, a crude oil pipeline commencing in Guernsey, Wyo., and terminating in Cushing, Okla., that includes a lateral in northeast Colorado that commences in Weld County and interconnects with the pipeline just east of Sterling, Colo.
In addition, the company provides natural gas transportation and storage services for customers in the Rocky Mountain and Midwest regions of the United States through the Tallgrass Interstate Gas Transmission system, a FERC-regulated natural gas transportation and storage system located in Colorado, Kansas, Missouri, Nebraska and Wyoming, and the Trailblazer Pipeline system, a FERC-regulated natural gas pipeline system extending from the Colorado and Wyoming border to Beatrice, Neb.
Investors receive a 6.97% distribution. RBC has a $40 price target, but the consensus estimate is higher at $45.23. The shares closed Friday at $36.71.
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All four of these top picks make good sense for investors looking to play a second-half 2016 and 2017 sector rebound. Should oil languish in the recent trading range, they should still offer stability. It is important to remember that MLP distributions may contain return of capital.
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