Analysts Pick 10 Energy MLP Stocks For 2018

Sections of pipe sit on top of wooden supports at a construction site for a natural gas liquids pipeline project in Pennsylvania. (Photo by Charles Mostoller/Bloomberg)

Master limited partnerships involved in the energy midstream business, which includes oil and gas transportation, processing and storage, weren’t exactly great stock performers last year. The Alerian MLP Index, their primary benchmark, was down 13% without dividend yields and 6.5% even with dividend yields.

That surprised a lot of analysts, including those at Raymond James, which had expected a nominal gain of 8% to 10% last year plus a 7% yield given increasing visibility into volume growth at low risk. “Sentiment remained beyond despondent,” they lamented in a recent report.

Despite a rising interest rate environment and corporate tax reform overhang, the firm believes this year may be better for these investment vehicles. Its analysts think longer-term, improving fundamentals across an overhauled capital allocation platform should result in better returns on invested capital with lower risk. “Thus, as returns improve, so should fund flows (all else being equal),” they said.

The firm thinks valuations also should improve regardless of oil prices as the market “de-risks the thesis” that $55 to $65 per barrel oil is enough to support the U.S. production growth that’s expected over the next three years.

Noting the “bullish tailwind” to January’s performance, the analysts say a mix of stable and growing distributions with lower risk – along with an 8% to 10% price appreciation forecast – should keep the index yield near 7% this coming year. They also offer up their 10 top stock picks for investors to consider among the multitude of midstream MLP’s out there.

The names include Antero Midstream Partners and parent Antero Midstream GP as well as MPLX. In the natural gas gathering world, they say these entities have the most running room in the Marcellus/Utica region in Appalachia and the northeastern U.S. with much of their growth coming from their joint-owned Sherwood assets in West Virginia.

Raymond James also likes Andeavor Logistics, which last year acquired Western Refining Logistics for $1.5 billion but also bought the incentive distribution rights and some assets owned by sponsor Andeavor, the refiner formerly known as Tesoro.

The analysts’ other favorites include Enterprise Products Partners, which is exporting more and more product (although they note it’s encountered delays getting its Mont Belvieu propane dehydrogenation plant online); and Kinder Morgan, whose Gulf Coast Express pipeline project in West Texas’ Permian Basin is moving forward with 85% in shipper commitments (from Apache, Pioneer Resources and Exxon Mobil’s XTO) with a start-up date expected by October of next year.

Kinder Morgan has been slammed by the markets in recent years for taking on debt to fund projects like these. But Raymond James says investors are now “eyeing the payoff” as these projects will boost future cash flows and provide excess cash that can be returned to shareholders via larger dividends and a $2 billion buyback program over the next two years.

Then there’s Plains All American Pipeline (and its parent Plains All American GP), which also is expanding its network. Raymond James thinks the partnership could possibly merge with another large midstream provider such as Enterprise, Magellan Midstream or MPLX to diversify and increase the size of its network.

The analysts’ last two picks include Targa Resources, which also is developing new projects (i.e., the Grand Prix in the Permian with funding from the Blackstone Group). They think Targa also could potentially merge with MPLX, which they say would create a “geographically diverse gas processing and rich gas value chain powerhouse.”

Their other pick is Williams Partners, which, along with parent Williams Cos., has some the  best positioned assets to address upcoming growth in gathering, processing and transporting natural gas supply in the Marcellus/Utica as well as supplying demand markets along the Gulf Coast, Mid-Atlantic and Southeast regions of the U.S.

Could the Williams franchise merge with Enterprise, an idea that was bandied about previously? It’s possible: Enterprise has  an attractive cost of capital that would allow it to pay a healthy multiple for Williams, the analysts said. They also are  under the impression that Enterprise would be interested in developing a c-corp. entity, especially in a post-tax reform world, and that transaction would make it easier.