Highest Yielding MLPs That Can Outperform for the Rest of 2014

Despite a sell-off earlier in the year, the top energy master limited partnerships (MLPs) finished up the first half of the year in pretty good shape. In fact, on a total return basis, which is increase in price plus distributions, the Alerian MLP index has outperformed the S&P 500 by a 15.2% to 6.1% basis. With continued firm energy pricing and demand, and a slow grind higher in interest rates, there could be good opportunities for investors for the second half of 2014.

A new research report from RBC point outs that hawkish commentary from the Federal Reserve has tapped the brakes on MLPs to start the third quarter. While acknowledging that the super easy policy is starting to wind down, the RBC team continues to view the fundamental backdrop as highly attractive for investment.

We screened their top stocks rated Outperform for those with the highest distributions. Remember, that MLP distributions can contain return of principal.

Atlas Resource Partners L.P. (NYSE: ARP) is a high-yielding name with outstanding growth potential. RBC analysts are anxious for the company’s update on the partnership drilling capital program amount to be raised in 2015. Atlas is an exploration and production MLP that owns an interest in more than 13,000 producing natural gas and oil wells, and it is also the largest sponsor of natural gas and oil investment partnerships in the United States. Investors are paid a giant 11.5% distribution. The RBC price target is $26. The Thomson/First Call consensus target is $23. Shares closed trading Monday at $20.02.

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Breitburn Energy Partners L.P. (NASDAQ: BBEP) is known for the industry’s most accretive acquisitions, which means that each deal generates above-average returns. In fact, the company posted $2.1 billion worth of deals from 2011 to 2013. The RBC analysts are looking forward to a company update in regards to the $600 million acquisition target for 2014. Investors are paid an outstanding 9.1% distribution. The RBC price target is $22, while the consensus is at $22.77. Breitburn closed Monday at $21.97.

Energy Transfer Partners L.P. (NYSE: ETP) is engaged in the natural gas midstream and intrastate transportation and storage businesses in the United States. The company’s Midstream segment gathers, compresses, treats, blends, processes and markets natural gas in the major U.S. basins and shales, including the Permian Basin in West Texas. The MLP has approximately 7,800 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas. Investors are paid a very solid 6.6% distribution. The RBC price target is $61, and consensus stands slightly higher at $61.90. Shares closed trading Monday at $56.32.

Legacy Reserves L.P. (NASDAQ: LGCY) is ranked as a Top Pick at RBC, and with good reason. The company is an oil and gas upstream MLP that has extensive properties in the liquids-rich Permian Basin, Mid-Continent and the Rocky Mountains. Legacy has a very strong hedging strategy in place to mitigate cash flow volatility. The company has 92% of its expected oil production and 67% of its natural gas production hedged through 2014 at favorable prices. Investors are paid a very strong 7.7% distribution. The RBC price target is $36, and the consensus target is much lower at $31.42. Shares closed Monday at $30.42.

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Linn Energy LLC (NYSE: LINE) is a somewhat controversial name, rated Outperform, that could bring investors big returns. In fact, the RBC analysts are awaiting more color and details on the dismissal of a class action lawsuit filed against the company. It also recently announced the acquisition of $2.3 billion worth of natural gas heavy assets from Oklahoma-based Devon Energy. The deal includes the acquisition of five U.S. operating areas and is very significant. Investors are paid a sizable 9.3% distribution. RBC has a solid $38 price target, and the consensus is at $34. The stock closed Monday at $31.53.

Mid-Con Energy Partners L.P. (NYSE: MCEP) is a smaller Oklahoma-focused oil pure play with a twist. It injects high-pressure water into its fields to increase pressure and generate the highest margins in the industry. The RBC team is anxious for updates on future potential basins for additional waterflood project acquisitions that could increase production. Investors are paid a big 9.2% distribution. The RBC price target is $27, and the consensus stands at $25.71. Shares ended trading Monday at $23.23.

QR Energy L.P. (NYSE: QRE) has a higher liquids proportion of 69% versus a peer average of 51%. The company also supports its cash flow with a very aggressive hedging strategy covering about 80% of its production. And it has a solid sponsor in the Quantum Resources Fund, which has a 32% stake and has already provided multiple asset drop-down opportunities in the past to fund acquisitions, and has potential to provide more in the future. Investors are paid a huge 10.7% distribution. The RBC price target is $19, and the consensus target is $19. The stock closed Monday at 18.47.

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While there is always the risk that higher yielding MLPs will be forced to cut their distributions, the RBC analysts have done an outstanding job at focusing on names in which the likelihood of such a cut is low. That is good to know, especially for income investors looking to add yield to their portfolios.

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