One almost shudders when thinking about how the energy master limited partnerships (MLPs) traded earlier this year. When 2016 started, the Alerian MLP index fell a stunning 30% in five short weeks as oil prices plummeted to the lowest levels in years. Since then, sentiment in the sector has improved, balance sheets have been cleaned up, the weak companies have been exposed and we have had a 50% bounce off the February 11 bottom. The question is, where do we go from here?
A new Deutsche Bank research report is cautiously optimistic on the second half of 2016, and there are areas the analysts continue to like. They caution that at current levels, we could be in for a sideways move as supply continues to even out. Four top companies are cited as the firm’s top picks. All are rated Buy at Deutsche Bank.
Enterprise Products Partners
This company is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Despite the energy slump, Enterprise Products Partners L.P. (NYSE: EPD) recently raised the distribution 1%. Enterprise Products maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.
One reason why many analysts may like the stock is its distribution coverage ratio. That ratio is well above one times, making it relatively less risky among the MLPs. The company’s distributions have grown for several quarters, and recently Enterprise Products increased the quarterly cash distribution paid to partners to $0.395 per common unit, or $1.58 per unit on an annualized basis.
This is the 56th distribution hike since Enterprise’s initial public offering in 1998. Also, this is the 47th time that the company has increased its quarterly payout. The distribution signifies a 5.3% increase over the distribution in the first quarter of 2015.
Enterprise investors receive a very solid 5.91% distribution. The Thomson/First Call consensus price target for the stock is $32.08. Shares closed Wednesday at $27.73.
Energy Transfer Partners
This stock has been mauled over the last year and is still offering investors a big distribution and a solid 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 are paid a huge 11.60% distribution, which may be cut. The consensus price target is $39.87. Shares closed Wednesday at $36.68.