Energy Business

Despite Rally, MLP Index Still Down for 2016: 4 Quality Companies to Buy

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.

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.