Is More Weakness Ahead for MLPs With Q2 Earnings?

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If one segment within energy would like to avoid further weakness, the master limited partnerships (MLPs) might want to see some growth or stability. This segment is not supposed to have direct exposure to oil and gas prices, and it is supposed to offer high income and distributions by acting as a toll-road collector rather than having exploration and production exposure in oil and gas.

The problem with MLPs is that many distributions had to be cut or eliminated during the hard times, and MLPs have in general not seen a major price recovery, even though oil has recovered handily. It’s almost as if oil and gas investors in MLPs are sometimes taking on much of the downside risk in the industry without the upside, just to get those beneficial distributions.

Credit Suisse has an updated view on its midstream and MLP earnings for the second quarter, and the firm is suggesting that a defensive tone could emerge. The firm’s Spiro Dounis and research team are largely expecting weaker sequential results driven by lower natural gas liquid (NGL) and natural gas prices, increased operating expenses and slower producer activity. Commodity prices continued to decline and producers continued to slow activity in the name of free cash flow during the second quarter. The firm expects management teams to remain constructive, and they do not see any retrenchment in capital plans.

Perhaps the only good news here in this view is that Credit Suisse does believe the consolidation trend will continue.

Credit Suisse has revised target prices for several names with a bias to the downside, largely driven by lower expected production growth, re-contracting risks due to competing projects and even from an expected round of equity issuances. Stronger expected margins drive a price target revision to the upside.

Additional data from the Credit Suisse report has been included on the largest MLPs and entities inside that long report.

Altus Midstream Co. (NASDAQ: ALTM) was reiterated as Outperform with an $8 target price. It is a pure-play, Permian midstream C-corp, anchored by Apache Corporation’s gathering, processing and transportation assets at Alpine High. Altus also owns options in five gas, NGL and crude oil pipeline projects from the Permian Basin.

Antero Midstream Corp. (NYSE: AM) was reiterated as Neutral and the target price was lowered to $14 from $15. With a prior closing price of $11.54 a share, it has a yield of about 10.7% and a $5.9 billion market cap.

BP Midstream Partners L.P. (NYSE: BPMP) was reiterated with an Underperform rating and a $15 target price. Its prior closing price was $16.13. It has a yield of about 7.9% and a $1.7 billion market cap.

Cheniere Energy Inc. (NYSEARCA: LNG) was reiterated with an Outperform rating and an $81 target price, compared with a prior closing price of $68.48. It has a $17.6 billion market cap.

Cheniere Energy Partners L.P. (NYSEARCA: CQP) was reiterated as Underperform with a $39 target price. With a prior closing price of $43.65, it has a yield of about 5.5% and a $21.2 billion market cap.

DCP Midstream L.P. (NYSE: DCP) was reiterated with an Outperform rating and a $39 target price. With a prior closing price of $31.15, it has a yield of about 9.9% and a $4.5 billion market cap.

Delek Logistics Partners L.P. (NYSE: DKL) was reiterated as Underperform with a $30 target price. The prior closing price was $32.00, and it has a yield of about 10.0% and a $787 million market cap.