It started back in March, and then one day the roof caved in. The energy master limited partnerships (MLPs) were crushed when the Federal Energy Regulatory Commission (FERC), which is the U.S. federal agency that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce and regulates the transportation of oil by pipeline in interstate commerce, came out with new rulings that profoundly affected the industry.
Investors panicked, thinking that they would be losing some of the benefits to owning MLPs, and shot first and sold and asked questions later. However, recently some favorable changes to the rulings came from the FERC, and a new Deutsche Bank research report noted those positive revisions:
In short, MLPs with corporate parents are essentially excluded from the proposed changes, and accumulated deferred income tax (ADIT) reimbursement concerns have been eliminated for all impacted MLPs. More comprehensively, the final rule clarifies several items including (largely quoted from source documents): (1) Although the Commission determined in the RPS that permitting MLP pipelines to include a tax allowance in their cost of service results in a double recovery of the MLP pipeline’s tax costs, the Commission will not require MLP pipelines to eliminate their tax allowances in this rule-making proceeding.
While the segment rebounded some in the second quarter from the drubbing the stocks took in March, many of the top companies are trading well below highs posted in 2014 and may be offering investors looking for energy exposure and income an incredible entry point.
With production surging in the Permian Basin, and some bottlenecks occurring with transportation, 2019 and especially 2020 may be the years when things are finally smoothed out some. The Raymond James MLP team is very positive on a selection of top companies they feel will outperform the market on a longer term basis. We selected five that look like outstanding buys now and had some of the highest distributions. All are rated Strong Buy at Raymond James.
This is the former Tesoro Logistics and is the highest yielding MLP in the Raymond James top picks. Andeavor Logistics L.P. (NYSE: ANDX) is a San Antonio, Texas-based energy MLP primarily engaged in crude oil gathering, crude oil and refined products transportation, natural gas gathering and processing, and terminaling in the western United States.
The company was formed by independent U.S. refiner Andeavor, which was recently purchased by Marathon Petroleum.
In a positive sign for investors, the company increased its distribution to $1.03 per quarter. Investors now receive a 9.05% distribution. The Raymond James price target for the shares is $50, and the Wall Street consensus target is $48.71. The shares closed Wednesday at $44.29.
Enterprise Products Partners
This is a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) is the largest publicly traded MLP and its midstream energy services include gathering, processing, transportation and storage of natural gas, natural gas liquids 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 $0.4275 per common unit, or $1.71 per unit on an annualized basis.
Investors receive a 5.85% distribution. Raymond James has a $33 price target, and the consensus target is $31.60. Shares closed Wednesday at $29.41.