Merrill Lynch Very Careful on MLPs Now: 4 for Energy Investors to Buy Now


Last year was a total disaster for the energy master limited partnership (MLP) space. The Alerian Index, which tracks the sector, was down a stunning 33%, and there was no company that didn’t feel a large degree of pain. One redeeming quality to many of the MLPs is that they are nowhere near as dependent on commodity pricing as exploration and production companies. Even with that caveat, the lower for longer scenario could be around for a while and caution is required.

A new report on the sector from Merrill Lynch noted that due to the extreme pressure on the sector last year, some investors even started to question the sustainability of the MLP business model and the sector as a whole. That is about as bearish as we have heard reported, and it could mark a true wash-out bottom, at least from a sentiment standpoint.

Merrill Lynch downgraded a stunning 10 stocks in their MLP research universe, and it also lowers its income ratings on an additional seven companies that remain rated Buy. We screened the Buy-rated stocks in the firm’s research universe and found four that make sense for more aggressive accounts.

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) once again, despite the energy slump, recently raised its distribution by 1%. The company maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.

One reason many analysts may have a liking for the stock might be its distribution coverage ratio. The company’s distribution coverage ratio is well above 1x, making it relatively less risky among the MLPs. The company’s distributions have grown for several quarters and are expected to continue in the rest of 2016. Plus the Standard & Poor’s current rating is BBB+, which is investment grade, and the outlook is stable.

Enterprise investors are paid very solid 6.75% distribution. The Merrill Lynch price target for the stock is $35. The Thomson/First Call consensus target is lower at $32.57. Shares closed Wednesday at $23.10, up over 5% on the day.

Energy Transfer Partners

This stock has been mauled and is offering investors a top quality distribution. Energy Transfer Partners L.P. (NYSE: ETP) currently owns and operates approximately 35,000 miles of natural gas and natural gas liquids (NGLs) pipelines. It also owns 100% of Panhandle Eastern Pipe Line (the successor of Southern Union) and a 70% interest in Lone Star NGL, a joint venture that owns and operates NGLs storage, fractionation and transportation assets.

In November, Energy Transfer Partners and Sunoco announced the dropdown to Sunoco of the remaining 68.42% interest in Sunoco LLC and 100% interest in the legacy Sunoco retail business for approximately $2.226 billion. Sunoco is expected to pay to Energy Transfer Partners approximately $2.2 billion in cash (including the expected value of working capital) and also will issue approximately 5.7 million common units valued at approximately $194 million. This now completes the $5.7 billion total retail business dropdown in just over a year.

Energy Transfer shareholders receive a huge 14.56% distribution that possibly may be cut. The Merrill Lynch price target is $30. The consensus target is much higher at $44.07. Shares closed Wednesday at $28.98, up over 6%.
Magellan Midstream Partners

This top midstream company checks in high on the ratings list. Magellan Midstream Partners L.P. (NYSE: MMP) primarily transports, stores and distributes refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation’s refining capacity, and can store more than 95 million barrels of petroleum products such as gasoline, diesel fuel and crude oil.

The company sports a BBB+ credit rating from S&P, and the outlook is listed as stable. One main reason for the very positive ratings is that almost 85% of Magellan Midstream’s operating margin is protected by long-term, fixed-fee contracts, meaning that its cash flow is not just recurring but highly predictable and also largely immune from energy prices. This helps to keep the distribution safer.

Magellan investors are paid a 4.82% distribution. The Merrill Lynch price objective is $67, while the consensus price target is $74.92. Shares closed Wednesday at $65.19.

NuStar Energy

This company posted solid fourth-quarter numbers and is a good bet for aggressive accounts. NuStar Energy (NYSE: NS) is one of the largest independent liquids terminal and pipeline operators in the nation. NuStar currently has approximately 8,700 miles of pipeline and 79 terminal and storage facilities that store and distribute crude oil, refined products and specialty liquids. The partnership’s combined system has approximately 93 million barrels of storage capacity, and NuStar has operations in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, and the United Kingdom.

The company reported fourth-quarter revenues of $464.9 million which was down 31.8% from $681.7 million during the same period in 2014. Despite the drop in revenue, NuStar reported net income of $59.5 million during fourth quarter, up 11.4% from $53.4 million during the same quarter in 2014. Those are numbers that investors can feel very good about.

NuStar investors are paid a 13.02% distribution. The Merrill Lynch price objective is set at $40, and the consensus target is slightly higher at $42. Shares closed Wednesday at $33.64, up almost 5%.

The going will remain tough, and even if some cuts are made in pricing, the climb back for crude prices could be a long one. Owning these top MLPs makes good sense for aggressive growth and income investors. Remember that MLP distributions can contain return of principal.

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