RBC Sees MLPs in a New Trading Range: 4 Top Picks Now

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With the first positive quarter in the books in over two years, the energy master limited partnership (MLP) Alerian index (AMZ) has long since broken the downtrend from highs posted in 2014. In fact, the index has retraced 30% of the August 2014 to February 2016 decline. In another positive sign, the index is also trading 23 points above the 200-day moving average. However, after such a strong move, the index could be moving into a more compacted trading range between 300 and 322.

In a new research report from RBC, they noted:

In mid-May, we observed the evolution in MLP financing sources during the downturn as the capital markets were mostly closed in the back half of 2015 and early 2016. We noticed that as valuations and commodity prices improved in 2Q16, the capital markets essentially opened back up for select MLPs.

These are very positive developments for a sector in which the equity capital markets were all but closed for over a year. We screened the RBC research database and found four companies that have solid upside to the firm’s target prices. All are rated Outperform.

Dominion Midstream Partners

This company has solid upside potential and is offering investors a good entry point now. Dominion Midstream Partners L.P. (NYSE: DM) is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 25,700 megawatts of generation, 12,200 miles of natural gas transmission, gathering and storage pipeline and 6,500 miles of electric transmission lines. It operates one of the nation’s largest natural gas storage systems, with 933 billion cubic feet of storage capacity, and serves more than 5 million utility and retail energy customers in 14 states.

The company missed first-quarter estimates back in May and was knocked down hard. With almost 6% of the float sold short, and some on Wall Street bearish on the company, any return to solid numbers and good forward guidance could give shares a big upside boost.

Dominion shareholders are paid a 3.31% dividend. The RBC price target for the stock is a strong $41, and the Thomson/First Call consensus target is lower at $37.70. Most recently, its shares closed at $27.34.

Enterprise Products Partners

This 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.

Investors are paid a very solid 5.51% distribution. The RBC price target is set at $34, and the consensus target is higher at $32.58. The stock closed most recently at $29.05 per share.