After what was a somewhat dismal 2017 for the energy master limited partnerships (MLPs), 2018 could bring some good cheer for holders of the shares. The just completed Republican tax reform plan is reasonably positive for the sector, and with MLP yield spreads to the 10-year Treasury wider than usual, the potential for solid total return gains is in play. Plus, it’s important to note that with the S&P 500 up almost 20%, compared to the MLP Alerian index that is down right at 14% year to date, there is value to buy in a pricey market.
In a new research report, analysts at RBC see oil demand growing in 2018 to 1.5 million barrels per day. That combined with continue OPEC production cuts should actually produce moderate inventory draws. That is a distinct change from months of bloated inventories that kept prices in check.
The RBC team has eight preferred MLP picks currently, and here we picked the five with the largest total return upside potential. All are rated Outperform at RBC.
Shares of this off-the-radar company could have the highest total return potential of those in the RBC universe. Archrock Partners L.P. (NASDAQ: APLP) is a compression services MLP.
The company’s contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining equipment to provide natural gas compression services to its customers. It serves companies engaged in various aspects of the oil and natural gas industry, including natural gas producers, processors, gatherers, transporters and storage providers. The company markets its services through sales and field service personnel.
The analysts note that the company carries a distribution coverage of a solid 1.8 times and is focused on lowering debt before it continues distribution growth.
Shareholders are paid an outstanding 9.67% distribution. The RBC price objective for the stock is $13, but the Wall Street consensus target is $16.42. The shares traded early Tuesday at $11.75.
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:
The company has under-performed on growth project challenges and equity overhang. We believe these headwinds have mostly subsided and Energy Transfer is on path for cash flow growth as growth projects including DAPL, Rover, ME2/2X and Revolution come online and/or continue to ramp. As cash flow increases, we expect natural de-leveraging and a path to simplification.
Energy Transfer unitholders receive a massive 12.8% distribution. RBC has a $22 price target. The consensus target is $24.70, and shares traded at $17.70 Tuesday morning.