Energy

Why Merrill Lynch Sees Enterprise Products and Top MLPs Rising Higher After Earnings

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With oil prices down over 15% from the highs recently posted, some have become a touch nervous on the energy sector. The reality is this is probably a pretty normal retracement in the spot price after an almost 100% run off the lows that were posted back in February. The good thing for investors is some of the top stocks in the energy and master limited partnership (MLP) space have backed up and are offering a very solid entry point.

A new Merrill Lynch research note sees the potential and raises price targets on some of the top stocks in the firm’s energy research coverage universe. Three particular Buy-rated Buy with price targets raised make good sense for investors looking to add energy companies to portfolios now.

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.

The company’s distributions have grown for several quarters, and Enterprise Products just increased the quarterly cash distribution paid to partners to $0.40 per common unit, or $1.60 per unit on an annualized basis. This is the 57th distribution hike since Enterprise’s initial public offering in 1998.

Merrill Lynch remains positive on the rest of 2016 as volume headwinds for the company are lowered as new projects come online. The firm cites the commercial operations at the company’s ethane export facility and two gas processing plants in the Permian as the big contributors. It also cites the 1.2 times distribution coverage as a positive.

Investors are paid a very solid 5.51% distribution. The Merrill Lynch price target for the stock was raised to $32 from $30. The Wall Street consensus price target is $32.42. Shares closed Tuesday at $29.06.

Green Plains Partners

This clean energy stock has gained a strong Wall Street following. Green Plains Partners L.P. (NASDAQ: GPP) is an unconventional renewable energy pick, but with a market capitalization just over half a billion dollars and a big dividend yield, this company could be a nice income or growth hold. The Nebraska-based company specializes in the storage, processing and transportation of ethanol fuel. Ethanol is already a major component of current fuel options. Most retail gasoline contains some ethanol, but there is a push to increase the use of pure ethanol fuel for commercial purposes.

Demand for renewable liquid fuels is expected to grow twofold by 2030, and fourfold by 2040. Green Plains is looking to capitalize on this push and adoption by providing the infrastructure that will underpin the industry as it expands.

Green Plains shareholders receive an outstanding 9.5% distribution. Merrill Lynch raised the price target from $17 to $19. The consensus target is $18.14. Shares closed Tuesday at $17.28.

Holly Energy Partners

This stock is looking to breakout from a long sideways move that started in 2013. Holly Energy Partners L.P. (NYSE: HEP) owns and operates petroleum product and crude pipelines, storage tanks, distribution terminals and loading rack facilities.

The company’s pipeline assets include approximately 810 miles of refined product pipelines that transport gasoline, diesel and jet fuel from New Mexico to Texas, Arizona, Utah and northern Mexico; approximately 510 miles of refined product pipelines that transport refined products from Texas to Oklahoma; three 65-mile pipelines that transport intermediate feedstocks and crude oil from Lovington, New Mexico, to Artesia, New Mexico; and approximately 940 miles of crude oil trunk, gathering and connection pipelines located in West Texas, New Mexico and Oklahoma.

The company’s pipeline assets also consists of approximately eight miles of refined product pipelines that support Woods Cross refinery in near Salt Lake City, Utah; gasoline and diesel connecting pipelines located at Tulsa East refinery facility; five intermediate product and gas pipelines between Tulsa east and west refineries; and crude receiving assets located at Cheyenne refinery, as well as 427-mile refined products pipeline.

Holly Energy Partners is known across the sector for being conservative with both its payout and its debt levels. The company’s distribution coverage ratio, which is generally the most common metric for measuring an MLP’s dividend safety, was 1.67. In an industry where a coverage ratio of 1.2 or greater is outstanding, shareholders are in good shape going forward, as is the company.

Shareholders receive a 6.5% distribution. The Merrill Lynch price target goes from $37 to $38, the same as the consensus target. Shares closed Tuesday at $35.48.

All three of these top companies make good sense for growth and income investors. Keep in mind that MLP distributions may contain return of capital.

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