Why RBC’s Preferred MLP Picks Could Have Big Q2 Upside Potential

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Even though oil has remained above the $60 a barrel level, the energy master limited partnerships (MLPs) have still languished due to the recent uncertainty cast on the sector by the Federal Energy Regulatory Committee. Since 2005 the FERC allowed MLPs to factor in the recovery of an income tax allowance (ITA) in setting their tariff rates for regulated cost-of-service pipelines. On March 15, 2018, the committee announced a new rule that will prevent MLPs from recovering the ITA.

Massive selling hit the industry because of the ruling, and although many of the stocks have recovered, the Alerian Index, which tracks the sector, is still down 8.7% for the year. The good news for investors is many of the top MLPs have little or even no exposure to the ruling and were just sold along with the stocks that do.

We screened the current RBC Preferred MLP picks for the week against a list of companies that have little or no exposure to the FERC ruling and found four that match up. All are rated Outperform and could offer income investors looking for energy exposure some big upside.

Enterprise Products Partners

This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, natural gas liquids (NGLs) fractionation, import and export terminaling, and offshore production platform services.

One reason why many analysts may like the stock might be its distribution coverage ratio. That ratio is well above one-times, making it relatively less risky in its sector. The company’s distributions have grown for several quarters, and last year Enterprise Products announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.4225 per common unit, or $1.70 on an annualized basis.

Investors receive a 6.95% distribution. The RBC price target for the shares is $34 and the Wall Street consensus target is $31.48. Shares closed Monday at $24.46.

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 NGLs; and the transportation and storage of crude oil and refined petroleum products.

Despite the issues from the FERC ruling, the company posted strong fourth-quarter results and announced capital expenditures for 2018 would be right at $2.2 billion, above Wall Street estimates.

Unitholders receive a 7.58% distribution. RBC has a $44 price target, and the consensus target is $42.06. Shares closed Monday at $32.07.

ONEOK

The volatile price of natural gas over the past year has weighed some on this top energy stock. ONEOK Inc. (NYSE: OKE) primarily engages in natural gas transportation, storage and natural gas and NGLs gathering, processing and fractionation in the Bakken, Mid-Continent and Permian. The company recently closed the roll-up of its underlying master limited partnership, ONEOK Partners.

The company has a strong presence in the Oklahoma SCOOP/STACK (NGL gathering/takeaway system, G&P), the Williston Basin (G&P, NGL takeaway) and the Permian Basin (NGL gathering, NGL takeaway, natural gas takeaway), which RBC feels provides high-return growth opportunities.

The analysts are also positive on the company’s primarily fee-based earnings, which account for 90% of the total earnings.

Investors receive a 5.43% dividend. The $70 RBC price objective compares with the $63.88 consensus target. Shares closed most recently at $56.75.

Western Gas Partners

Another defensive play, it has a great balance sheet and limited commodity price risk. Western Gas Partners L.P. (NYSE: WES) is a growth-oriented MLP formed by Anadarko Petroleum to acquire, own, develop and operate midstream energy assets.

Western Gas Partners has midstream assets located in the Rocky Mountains, the Mid-Continent, north-central Pennsylvania and Texas. The company is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, natural gas liquids and crude oil for Anadarko, as well as for other producers and customers.

The company looks to be well positioned to drive above-average distribution growth over the next several years through organic growth opportunities across its liquids-rich areas. Highly visible above-average distribution growth potential coupled with a predominantly fee-based/fixed-price revenue stream and investment grade balance sheet warrants a premium valuation to peers.

Shareholders receive an 8.76% distribution. RBC has set its price objective at a massive $61. The consensus price target is $56.89. Shares closed Monday at $42.

It is also important to note that none of the companies that are in the Preferred Picks list pay any incentive distribution rights (IDR). Typically, an IDR agreement between an MLP and its sponsor (also known as the general partner) entitles the sponsor to a share of the distributions made by the partnership above a minimum threshold. This makes them better values for investors. All these companies make good sense after the recent beating they have taken.