Energy

Why Energy Master Limited Partnerships May Be the Best Contrarian Bet Ever

Lee Jackson

Published: August 30, 2019 8:00 am

Last Updated: July 14, 2022 7:50 am

If any sector has taken a beating recently it is energy, and within the sector the master limited partnerships (MLPs) have been the real whipping boy. While the benchmark price of oil tends to weigh on the exploration and production companies, many of the top MLPs are in the transportation and storage business. Despite that crucial difference, they have been massacred, with many investors abandoning them entirely.

The key for many investors should be the massive distributions that many of the top companies pay. In a world where yields are shrinking daily, those distributions could be big in the coming months and years, especially if U.S. interest rates fall to zero or even negative levels.

We screened the Merrill Lynch MLP research database looking for top companies that have been laid to waste, and we found four that income investors may want to take a second look at. All are rated Buy and pay massive distributions.

DCP Midstream Partners

This high-yielding company makes sense for accounts looking for income. DCP Midstream Partners L.P. (NYSE: DCP ) is primarily engaged in natural gas gathering, processing, transportation and marketing, as well as transportation and marketing of natural gas liquids (NGLs) and wholesale distribution of propane, in the Northeast and the Midwestern United States.

Over two years ago, DCP’s predecessor and its general partner, DCP Midstream, announced a transaction combining all the assets and debt. The transaction created one of the largest natural gas gathering and processing MLPs in the United States.

Investors receive a gigantic 12.51% distribution. The Merrill price target for the shares is $31, and the Wall Street consensus target is $33. The shares closed Thursday at $24.95.

Enable Midstream

This company provides solid distributions with serious upside potential. Enable Midstream Partners L.P. (NYSE: ENBL) is primarily engaged in oil and natural gas services, including gathering, processing, transportation and storage. The company was formed to own the energy midstream assets of CenterPoint Energy and OGE Energy, which combined own Enable’s general partner.

Enable’s assets include approximately 13,900 miles of natural gas, crude oil, condensate and produced water gathering pipelines, around 2.6 billion cubic feet per day of natural gas processing capacity, approximately 7,800 miles of interstate natural gas pipelines (including Southeast Supply Header, of which Enable owns 50%), about 2,300 miles of intrastate natural gas pipelines and eight natural gas storage facilities comprising 84.5 billion cubic feet of storage capacity.

Investors receive a 10.43% distribution. Merrill has a $17 price objective, while the consensus target is $16.33. Shares closed at $12.67 on Thursday.

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Energy Transfer

The top master limited partnership is a very safe way for investors looking for energy exposure and income. Energy Transfer L.P. (NYSE: ET) owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint in all the major domestic production basins.

This publicly traded limited partnership has core operations that include complimentary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, NGLs and refined product transportation and terminaling assets; NGL fractionation; and various acquisition and marketing assets.

Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG, as well as the general partner interests, the incentive distribution rights and 28.5 million common units of Sunoco and the general partner interests and 39.7 million common units of USA Compression Partners.

Investors receive a 9.06% distribution. The $23 Merrill objective compares to the $21.16 consensus figure. Shares closed most recently at $13.47.

Targa Resources

This top energy midstream company actually is structured as a C-corp, and it has had a string of positives lately. Targa Resources Corp (NYSE: TRGP) is a leading provider of midstream services and 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 related 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 across Wall Street.

Investors receive a 10.25% distribution. Merrill has a price objective of $48. The consensus target is $46.86, and shares closed at $35.51, up over 4% on the day.

Needless to say, the mere suggestion of MLPs is a very contrarian idea now. Yet, the lower interest rates go, the more income-starved investors may start looking at the sector again. With oil appearing to be range-bound in the $50s, this could be a solid total return play as well, as all these top companies have been crushed.