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Analyzing MLPs With Solid Total Return Potential


Jul. 12 2019, Updated 5:18 a.m. ET

Solid gains?

MLPs have largely been flat after a notable increase early this year. Crude oil has risen more than 30%, while the Alerian MLP ETF (AMLP) has risen 15% YTD (year-to-date). The second-quarter numbers will likely be an important cue for these stocks in the short to medium term. Some of the MLPs offer handsome upside potential for the next 12 months based on analysts’ estimates. Along with capital gain, the MLPs offer a solid distribution yield, which makes them more alluring from the total return perspective.

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Energy Transfer looks attractive

Based on analysts’ estimates, Energy Transfer (ET) offers an estimated upside of more than 43%—the highest among our hand-picked MLPs. The company has a median target price of $21.1 compared to its current market price of $14.7. Energy Transfer is trading at a distribution yield of 8.4%. In comparison, AMLP yields close to 8%. Energy Transfer looks attractive given its premium yield and potential upside.

Among the 19 analysts covering Energy Transfer stock, ten recommended a “strong buy,” seven recommended a “buy,” and two recommended a “hold.” None of the analysts recommended a “sell” as of July 11.

Energy Transfer has raised its distribution 13.4% compounded annually in the last five years, which beat many of its peers. Kinder Morgan’s (KMI) distribution fell 15%, while Enterprise Products Partners’ (EPD) distribution rose 5% compounded annually in the last five years.

Energy Transfer stock is trading at a forward EV-to-EBITDA multiple of 9x, which is much lower than the peer average. Energy Transfer stock has risen 10% this year. The stock has underperformed its peers despite solid earnings growth for the last few quarters. Most of Energy Transfer’s segments contributed to its growth in the last few quarters due to higher production and growth projects coming online. Analysts expect Energy Transfer’s solid earnings growth to continue this year, which likely justifies its current valuation. Kinder Morgan and Enterprise Products Partners are trading at a forward valuation of 11x and 11.7x.

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EQM Midstream Partners

So far, EQM Midstream Partners (EQM) has been dull this year. The company has fallen marginally YTD. EQM Midstream continued its strong earnings growth streak in the first quarter. We’ll have to see how the company’s second-quarter numbers turn out.

Currently, analysts seem cautious about the stock. Analysts have given EQM Midstream has a median target price of $52.3. The target price indicates a potential upside of more than 20% for the next 12 months compared to its current market price of $43.5.

The Mountain Valley pipelines is EQM Midstream’s joint venture. Recently, the pipeline was delayed due to legal and regulatory challenges. The pipeline connects West Virginia and Virginia. The pipeline will likely be completed by mid-2020. The cost increased to $4.8 billion–$5.0 billion from $4.6 billion earlier.

EQM Midstream is trading at a distribution yield of 10.7%, which is notably higher than its five-year average yield of 4.4%. The company increased its distribution per unit 22.6% compounded annually in the last five years. EQM Midstream Partners is trading at an EV-to-EBITDA multiple of 8.6x. The multiple is lower than its five-year average valuation close to 11.6x. Analysts expect strong earnings growth from EQM Midstream for the next few quarters, which likely justifies its current valuation multiple.

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Western Midstream Partners

Western Midstream Partners (WES) offers a solid potential upside of 19% compared to its current market price of $31.4. Analysts have given the company a median target price of $37.4. Among the 14 analysts covering Western Midstream Partners, three recommended a “strong buy,” six recommended a “buy,” and five recommended a “hold.” None of the analysts recommended a “sell” as of July 11.

So far, Western Midstream Partners has risen more than 11% this year. The company is trading at an EV-to-EBITDA multiple of 11.0x, which is in line with many of its peers. Western Gas Partners and Western Gas Equity Partners completed their merger in February 2019 and formed Western Midstream Partners. Western Midstream Partners is an MLP formed by Anadarko Petroleum. The MLP operates midstream assets located in the Rocky Mountains, north-central Pennsylvania, and Texas.

Currently, Western Midstream Partners offers a distribution yield of 7.9%, which is higher than its five-year average yield of ~4%. What’s striking about the company’s distribution profile is its growth rate. The company has increased its distribution ~30% compounded annually in the last five years.

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Enable Midstream Partners

Enable Midstream Partners (ENBL) has a potential upside of 17% based on its median target price of $16.8. Currently, Enable Midstream Partners is trading at $14.3. Among 13 analysts tracking Enable Midstream Partners, eight recommended a “hold,” three recommended a “buy,” and two recommended a “strong buy.”

Enable Midstream Partners has underperformed its peers. So far, Enable Midstream Partners has gained 5% this year. Even though the stock has been dull, the distribution profile looks attractive. The stock is trading at a yield of 9% compared to its historical average yield of 8.2%.

Enable Midstream Partners is trading at an EV-to-EBITDA multiple of 9.4x based on its earnings estimates for the next 12 months. The stock looks attractive compared to peers’ average valuation and its historical valuation of ~11x. Enable Midstream Partners has posted better-than-expected earnings for the last few quarters. The company is scheduled to report its second-quarter earnings on August 6.

MLPs are usually perceived as high yielding, defensive plays. Despite fair earnings growth in the last few quarters, MLPs have been weak due to uncertainties about energy commodity prices. The 8% average distribution yield looks attractive given the spread of more than 6% against broader markets and Treasury yields. Geopolitical tensions could push investors towards safer investment avenues.


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