It’s becoming more and more clear that the attempt by OPEC and the Russians to slow production has started to hit a wall. With compliance hitting a six-month low in June, and American shale producers still operating at full speed, the black gold may be range bound. That said, energy is the only S&P sector that was down in the first half of 2017, so the value is enticing. The question is: Where should you put your investment chips now?
One outstanding area to pick may be the top energy master limited partnerships. While oil pricing is important to these companies, overall usage is as well. In a new research report from Deutsche Bank, the company thinks the second quarter may end up being the trough for the sector, and capital expenditure restraints put in as oil plunged through the last half of 2015 are surely helping now. We screened the top picks for the four that pay the highest distributions. All are rated Buy at Deutsche Bank.
Energy Transfer Equity
This master limited partnership brings the potential for solid growth and income. Energy Transfer Equity LP (NYSE: ETE) is a master limited partnership that owns the general partner and 100% of the incentive distribution rights (IDRs) of Energy Transfer Partners, L.P. (NYSE: ETP) and Sunoco LP (NYSE: SUN). The company also owns Lake Charles LNG Company. On a consolidated basis, the family of companies owns and operates a diverse portfolio of natural gas, natural gas liquids, crude oil and refined products assets, as well as retail and wholesale motor fuel operations and LNG terminalling.
The underlying Energy Transfer partnerships are levered broadly across key growth areas of the Permian for liquids and Marcellus/Utica for natural gas. Following the simplification transaction with Sunoco Logistics Partners, top analysts are modeling a double-digit three-year distribution growth compounded annual growth rate at Energy Transfer Partners, directly benefiting the company via the IDR structure.
Investors are paid a very solid 6.82% distribution. The Deutsche Bank price objective is set at $23, and the Wall Street consensus price target is $21.20. The shares closed trading on Friday at $17.71.
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. Once again, 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 of the reasons many analysts may have a liking for the stock might be its distribution coverage ratio. The company’s distribution coverage ratio is well above 1x, making it relatively less risky in the MLP sector. The company’s distributions have grown for several quarters, and last quarter Enterprise Products announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.42 per common unit, or $1.68 per unit on an annualized basis.
Enterprise investors are paid a very solid 6.16% distribution. The Deutsche Bank price target for the company is $33, and the Wall Street consensus price target is set at $32.74. Shares closed Friday at $27.28.
This is a company that reported very solid numbers, and may be more off the radar for some investors. MPLX LP (NASDAQ: MPLX) is a diversified, growth-oriented master limited partnership formed in 2012 by Marathon Petroleum Corporation to own, operate, develop and acquire midstream energy infrastructure assets. It is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of NGLs; and the transportation and storage of crude oil and refined petroleum products.
The company made a very well timed and strategic purchase of Mark West Energy last year for approximately $1.28 billion. The deal combined MarkWest, the second-largest processor of natural gas in the United States and largest processor and fractionator in the Marcellus and Utica shale plays, with MPLX. The combination created one of the largest master limited partnerships, which is expected to generate a mid-20% compound annual distribution growth rate through 2019.
MPLX unitholders are paid a very solid 6.05% distribution. The Deutsche Bank price target is posted at $45, and the consensus price target for the company is set at $43.33. Shares closed Friday at $35.70.
Williams Partners LP
This is another top company that shines as an investment grade choice. Williams Partners LP (NYSE: WPZ) is an industry-leading, large-cap master limited partnership with operations across the natural gas value chain from gathering, processing and interstate transportation of natural gas and natural gas liquids to petrochemical production of ethylene, propylene, and other olefins.
With major positions in top U.S. supply basins and also in Canada, Williams Partners owns and operates more than 33,000 miles of pipelines system wide, including the nation’s largest volume and fastest growing pipeline, providing natural gas for clean-power generation, heating and industrial use. Williams Partners’ operations touch approximately 30% of U.S. natural gas.
Williams shareholders are paid a solid 5.91% distribution. The Deutsche Bank price target is set at $53, while consensus price target for the company is at $55. The stock closed on Friday at $40.59.
While it is important to remember that MLP distribution can contain return-of-capital, these top companies remain solid picks in a low-yield environment, especially when you consider the underperformance of energy during the first half of 2017.