Energy

Why Energy MLPs May Be the Buy of the Decade Now

Lee Jackson

Published: August 2, 2018 8:15 am

Last Updated: January 11, 2020 8:00 pm

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.

Andeavor Logistics

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.

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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 has posted strong results and also announced that capital expenditures for 2018 would be right at $2.2 billion, which was above Wall Street estimates.

MPLX unitholders receive a 6.87% distribution. The $45 Raymond James price target compares with the consensus target of $41.94 and the most recent close at $36.52.

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 exporters; gathering, storing and terminaling crude oil; storing, terminaling and selling refined petroleum products.

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 U.S. energy basins, it remains a top pick for 2018 at Raymond James and across Wall Street.

Investors receive a 7.06% distribution. Raymond James has a price objective of $56. The consensus target is $54.75, and shares closed Wednesday at $51.59.

Williams Partners

This is yet another top company that shines as solid income play. Williams Partners L.P. (NYSE: WPZ) is an industry-leading, large-cap MLP with operations across the natural gas value chain from gathering, processing and interstate transportation of natural gas and natural gas liquids to petchem production of ethylene, propylene and other olefins.

With major positions in top U.S. supply basins and also in Canada, Williams Partners owns and operates more than 33,000 miles of pipelines systemwide — including the nation’s largest volume and fastest growing pipeline — providing natural gas for clean-power generation, heating and industrial use. Its operations touch approximately 30% of U.S. natural gas.

Investors are paid a 5.59% distribution. Raymond James has set its price target at $46. The consensus target is $46.28, and shares closed on Wednesday at $44.75.

While it is important to remember that MLP distributions can still contain return of capital, these top stocks remain solid picks in a low-yield environment, especially when you consider the underperformance of energy MLPs during the first half of 2018.