The move to 2.53% in the 10-year Treasury is still near the lower end of the range of 1.5% to 5.1% since 2003. Of significance to the master limited partnership (MLP) analysts at Deutsche Bank A.G. (NYSE: DB) is that the lowest spread in the MLP yield differential to the 10-year of 130 basis points, or 1.30%, occurred when the rate was at the peak. Considering that the dividend and distribution growth rates are higher now than at that point in 2007, they expect that the natural gas and MLP yields reaction to higher rates is much more behind than ahead.
The Deutsche Bank teams positioning in the natural gas and MLP sectors has long been to favor the fee-based companies and partnerships and avoid significant commodity price leverage, especially to natural gas liquids (NGLs). Here are the top stocks to buy that they believe will have much less blowback from higher rates or lower oil pricing.
Enbridge Inc. (NYSE: ENB) operates as an energy transportation and distribution company in the United States and Canada. Its Liquids Pipelines segment operates common carrier and contract crude oil, NGLs and refined products pipelines and terminals. The company owns and operates the largest natural gas distribution company is Canada. The Deutsche Bank price target is at $52. The Thomson/First Call estimate is at $53. Unitholders receive a 3.0% distribution. Remember, MLP distributions can contain return of principal.
Kinder Morgan Inc. (NYSE: KMI) has been a top MLP name to buy for years. The company has 80,000 miles of pipelines and 180 terminals that transport natural gas and petroleum products. The company is expected to be a large benefactor of increase domestic production. The Deutsche Bank price target is $48, while the consensus target is lower at $42. Unitholders receive a 4.2% distribution.
Spectra Energy Corp. (NYSE: SE) has seen an incredible amount of option activity in the stock. Less than two weeks ago, the company announced the transfer of pipeline assets to its limited partnership in a move that would lower taxes and boost dividends. Deutsche Bank has put a $36 target on the stock. The consensus number is $35. Unitholders are paid a 3.6% distribution.
SemGroup Corp. (NYSE: SEMG) recently announced a $350 million private placement to fund the pending acquisition of all the outstanding equity interests in Mid-America Midstream Gas Services and to repay amounts borrowed under the company’s corporate revolving credit facility. Deutsche bank has a $66 price target, but the consensus is at $61. Unitholders are only paid a 1.4% distribution.
Access Midstream Partners L.P. (NYSE: ACMP) very impressive revenue growth greatly exceeded the industry average of 10.6%. Since the same quarter one year prior, revenues leaped by 53.2%. Its business also is not exposed to much risk, as it is using a fixed-fee business model and it has contractual protections against inflation rates, interest rates and the cost of its operations. Deutsche Bank has a $57 price target, and the consensus is at $57 as well. Unitholders are paid a 4.0% distribution.
Enterprise Products Partners L.P. (NYSE: EPD) is also focused toward fee-based business and is generating strong cash flows. Enterprise also has paid regularly increasing quarterly distributions. The Deutsche Bank price target for this top name is $70, though the consensus target is $66. Unitholders receive a solid 4.6% distribution.
Plains All American Pipeline L.P. (NYSE: PAA) is an MLP that shows up on most Wall Street firms’ list of stocks to buy. Plains All American has an extensive network of assets in key oil-producing basins and transportation corridors, and at major market hubs in the United States and Canada. In addition, it is engaged in the development and operation of depleted reservoir and salt dome natural gas storage facilities through PAA Natural Gas Storage. The Deutsche Bank price objective is $66, while the consensus target is lower at $62.25. Unitholders are paid a 4.3% distribution.
The recent volatility in interest rates, commodity prices and overall markets strengthens the Deutsche Bank conviction that the best performers will be the most visible dividend and distribution growth entities that have minimal commodity risk and maximal opportunities for accretive organic growth. They also have put together a list of stocks to buy that are well prepared for an explosion in U.S. energy production.