Energy

UBS Most Preferred Energy MLPs May Be the Best 2018 Buys

Lee Jackson

Published: December 12, 2017 8:30 am

Last Updated: January 12, 2020 5:32 am

West Texas Intermediate crude is once again trying to knock on the door of $60 a barrel, and with less than three weeks left in the 2017 trading year, many investors have turned their attention to 2018 and the energy sector. While numerous strategists make the case that tax reform and other positives are not priced into current earnings and growth expectations, one thing is for sure. Despite the solid rise in crude oil, and a continuation of the OPEC production cuts, the energy sector, especially the master limited partnerships (MLPs) continue to underperform.

With a large number of positives providing a tailwind for the energy sector in 2018, we decided to screen the UBS MLP universe for stocks that paid solid distributions, were rated Buy and were on the firm’s Most Preferred list. We found five that look like great plays for 2018.

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 are paid a very solid 6.63% distribution. The UBS price target for the shares is $34, and the Wall Street consensus target is $31.83. The stock closed Monday’s trading at $25.49 a share.

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.

Energy Transfer Partners unitholders receive a massive 12.93% distribution. UBS has a $24 price target, while the posted consensus target is $26. The shares closed most recently at $16.61.

MPLX

This company reported very solid numbers but may be more off the radar for some investors. MPLX L.P. (NASDAQ: MPLX) is a diversified, growth-oriented MLP formed in 2012 by Marathon Petroleum 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 natural gas liquids (NGLs); and the transportation and storage of crude oil and refined petroleum products.

The company made a very well-timed and strategic purchase of MarkWest 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 MLPs, which is expected to generate a mid-20% compound annual distribution growth rate through 2019.

MPLX unitholders are paid a very solid 6.34% distribution. The $43 UBS price target compares with a consensus price target of $39.06. The stock closed the day on Monday trading at $37.06 per share.

Shell Midstream Partners

This top stock has been cut in half from highs printed in the summer of 2015, and it is offering an outstanding entry point. Shell Midstream Partners L.P. (NYSE: SHLX) owns, operates, develops and acquires pipelines and other midstream assets in the United States.

The company owns interests in four crude oil pipeline systems and two refined products pipeline systems, as well as a crude tank storage and terminal system. Its crude oil pipeline systems include approximately 350 miles of Zydeco pipeline system from Houston to St. James and Clovelly, Louisiana; and Mars pipeline system originating approximately 95 miles offshore in the deepwater Mississippi Canyon and in salt dome caverns in Clovelly, Louisiana.

The company’s refined products pipeline systems consist of 158-mile Bengal pipeline system connecting four refineries in southern Louisiana to long-haul transportation pipelines; and approximately 5,500 miles of pipeline connecting refineries along the Gulf Coast to approximately 265 marketing terminals between Houston, Texas, and Linden, New Jersey.

Investors are paid a smaller 4.58% distribution. UBS has set its price objective at a gigantic $47. The consensus target price is much lower at $37.11, and the shares closed most recently at $27.77.

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Targa Resources

This top energy MLP has had a string of positives lately. Targa Resources Corp (NYSE: TRGP) is a leading provider of midstream services and is one of the largest independent midstream energy companies in North America. Targa owns, operates, acquires and develops a diversified portfolio of complementary midstream energy assets.

The company is primarily engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling NGLs and NGL products, including services to liquefied petroleum gas (LPG) exporters; gathering, storing and terminaling crude oil; storing, terminaling and selling refined petroleum products.

The UBS team loves the company and noted this:

Targa Resources has one of the premier asset positions in the Permian basin. With solid management, a strong balance sheet, and attractive exposure to some of the most attractive US energy basins, in our view, Targa is well positioned for growth over the next few years. We believe the simplified corporate structure, growth potential, and attractive dividend are under-appreciated by investors. Better-than expected volumes and cash flow should drive the discounted valuation to a premium valuation.

Investors are paid a very nice 7.87% distribution. The UBS price objective is a whopping $60. The posted consensus target is $53, and the shares were last seen at $46.24.

All these top companies are offering investors an outstanding entry point after being clobbered much of the fall. The OPEC production cut, combined with other positive metrics, should put a tailwind behind the entire sector in 2018. It’s important to remember that MLP distributions may contain return of capital.