Despite crude oil prices rising since June, and with West Texas Intermediate now well over the psychological $50 mark, investors have shunned energy master limited partnerships (MLPs). While various reasons have been given, slowing distribution rates seem to be one of them, as a major player in the sector announced recently it will be doing just that. However, in a low-yield environment, the top MLPs are offering investors the best entry point since the spring of 2016.
A new research report, RBC cites slowing distribution growth as a factor but points out that in a rising interest rate environment, like the one we are currently in, while MLPs may underperform the broader market, they tend to outperform other income-producing investments. The report noted this:
While we expect interest rates to impact performance, we believe that the crude oil price will be the primary driver of MLP performance over the coming months. We find, that MLPs have generally outperformed Utilities and REITs, which are two of the more common yield-investment substitutes. This trend has held during the latest uptick in interest rates.
We screened the RBC MLP research universe and found four that are rated Outperform and are among the firm’s Preferred Picks. All these companies also pay outstanding distributions.
Enterprise Products Partners
This is one of the largest MLPs and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, recently raised its distribution 1%. The company 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 many analysts may like the stock might be its distribution coverage ratio. The company’s distribution coverage ratio is well above one times, making it a relatively less risky MLP. The distributions have grown for several quarters, and last quarter Enterprise Products Partners 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 $1.69 per unit on an annualized basis.
Investors in Enterprise Products Partners are paid a very solid 6.81% distribution. The RBC price target for the stock is $34, and the Wall Street consensus target was last seen at $31.83. The stock traded early Tuesday at $24.80.
Energy Transfer Partners
This company merged with Sunoco Logistics Partners last year. Energy Transfer Partners L.P. (NYSE: ETP) engages in the natural gas midstream and intrastate transportation and storage businesses in the United States.
The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas, and through ET fuel system and HPL system. It owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas. Its Interstate Transportation and Storage segment provides natural gas transportation and storage services; owns and operates approximately 12,300 miles of interstate natural gas pipeline; and has interests in various natural gas pipelines.
The Midstream segment gathers, compresses, treats, blends, processes and markets natural gas. It owns and operates 35,000 miles of in service natural gas, 31 natural gas processing plants, 21 natural gas treating facilities and four natural gas conditioning facilities.
The analysts noted this in the report:
We believe the surviving ETP entity has an improved cost of capital, more diversified asset base and greater ability to provide comprehensive solutions. Cash flow should increase substantially as large scale growth Projects come online/ramp (Bakken crude oil pipeline, Rover, ME 2 ), which should help leverage
Energy Transfer Partners unitholders are paid a massive 12.72% distribution. RBC has a $24 price target, which compares to the posted consensus target of $26. The traded at $17.35 just after Tuesday’s opening bell.