Looking at Energy MLPs with Strong Growth Prospects


Aug. 22 2019, Published 5:03 p.m. ET

The defensive sectors came back in focus as recession fears have grown recently. Energy MLPs (master limited partnerships) are generally seen as defensives due to their relatively higher yields.

The Alerian MLP ETF (AMLP) is up just 5% so far this year, while the S&P 500 Index has rallied 15%. However, what makes AMLP attractive is its distribution yield of 8.5%. In this article, we’ll look at the energy MLPs with solid yields that also offer handsome capital gains.

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MLP Review: Energy Transfer

The diversified midstream giant Energy Transfer (ET) has failed to please investors so far this year. Despite strong earnings growth in the last few quarters, ET stock has been unable to rebound. ET has gained approximately 5% while peer Kinder Morgan (KMI) has rallied 33% year-to-date. Enterprise Products Partners (EPD) is up about 20%.

According to Wall Street analysts, Energy Transfer stock has a mean target price of $21.20, implying a potential upside of 53% for the next 12 months. It closed at $13.80 on August 21.

Analysts also appear positive on ET stock at the moment. Among 20 analysts covering Energy Transfer, 10 analysts recommended a “strong buy,” eight recommended a “buy,” and two recommended a “hold.” Analysts have not given ET a “sell” rating in more than a year.

Energy Transfer offers a distribution yield of 9%, higher than AMLP. Also, Energy Transfer’s current yield represents a yield spread of more than 700 basis points compared to the broader markets and the benchmark Treasury yields. KMI yields 5% while EPD yields 6.1%.

Energy Transfer stock looks attractive based on its potential upside as well as its solid distribution yield.

Tallgrass Energy

Tallgrass Energy Partners (TGE) has a mean target price of $23.50 against its current market price of $15.70. This suggests a robust upside potential of 50% for the next 12 months. It is currently trading at a distribution yield of 13.8%, significantly higher than the Alerian MLP ETF (AMLP).

TGE stock has fallen approximately 30% in the last month, which made its yield look even more attractive. The fall in TGE was highlighted when its CEO, David Dehaemers, doubted the need for its expansion projects in the Bakken Shale in late July.

Analysts appear generally cautious on Tallgrass Energy stock. Among 14 analysts surveyed by Reuters that track TGE, ten recommended it as a “hold,” three recommended it as a “strong buy,” and one recommended a “sell.”

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DCP Midstream

DCP Midstream has a mean price target of $33.10, indicating an upside potential of 30%. It is currently trading at $25.60. Among 15 analysts covering DCP, eight analysts recommended it as a “hold,” five recommended a “buy,” and two recommended a “strong buy.” J.P. Morgan cut DCP’s target price from $38.00 to $32.00 on August 19. UBS also cut its target from $36.00 to $33.00 last week.

DCP Midstream reported better-than-expected numbers in Q2. Its net income attributable to partners doubled in the second quarter compared to Q2 2018. This MLP is trading at a yield of 11.8%.

DCP Midstream stock offers a robust total return potential given its solid estimated upside and healthy distribution yield. DCP Midstream forms 2.8% of the Alerian MLP ETF (AMLP).

NGL Energy Partners

The diversified midstream MLP NGL Energy Partners (NGL) is our last pick that offers a handsome total return potential. Based on analysts’ estimates, NGL Energy Partners has a price target of $17.14. This suggests a potential upside of 32% against its current market price of $13.00. UBS raised its price target from $16.00 to $17.00 last week.

NGL is trading at a distribution yield of 12%, notably higher than Alerian MLP ETF (AMLP).

Among seven analysts covering NGL, three recommended a “buy,” one recommended a “strong buy,” and three recommended a “hold.” None of the analysts recommended a “sell” on August 22.

As reported by Reuters, NGL Energy Partners has agreed to sell its TransMontaigne business unit to truck stop operator Pilot Flying J for roughly $300 million. The deal includes terminal agreements, line space on the Colonial and Plantation pipelines, and two refined product terminals in Georgia.

In our view, these hand-picked MLPs offer handsome upside potential. Also, the distribution yield they present is significantly above the industry average.

Midstream companies are indirectly susceptible to commodity prices through production levels. If crude oil and natural gas prices stay low, upstream players reduce production, ultimately impacting yjr midstream business.

Oil and gas prices have been volatile this year while MLPs’ earnings have grown. However, if you’re looking for a defensive play in this uncertain market scenario, MLPs look well placed with their premium yields.


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