13 members / 375 guests (24 hours)

An Interesting IDB update! And how IDB got even faster.  IDB is fast, reliable, and FREE to use. Just join and start posting!

2 MLPs That Could Energize Returns

2 MLPs That Could Energize Returns

 

Barron's Blog

Dow Jones Institutional News; New York [New York]09 Nov 2017.
By Dimitra DeFotis
 
With the Alerian MLP index down more than 15% this year in price, yield-hungry investors can buy master limited partnerships at a discount.
 
But not all are created equal. Consider that Energy Transfer Equity ( ETE) has produced a total return of negative 2.1% this year including distributions, as MLP yields are called, while the total return from Energy Transfer Partners ( ETP) is negative 26%. The Alerian MLP exchange-traded fund ( AMLP) is down 10.7% this year including distributions.
 
The two MLPs here are related, but pipeline operator ETE is a general partner whose ownership interests and economics are different (general partners typically manage daily operations and get compensation based on the partnership's performance, sometimes in an escalating manner). The divergence in the two MLPs' performance is striking, and poses an opportunity in each, according to Mizuho Securities Analyst Brian Zarahn. He has a buy rating on ETE and ETP. The logic: improving income due to "strong growth visibility from large projects entering service in 2018 and exposure to key midstream sector themes of rising crude/natural gas liquids (NGLs)/gas production, exports and ethane demand."
 
In the latest quarter, for ETP, which operates a logistics business with crude oil pipelines and terminal facilities, crude oil transportation and NGLs helped produce adjusted discounted cash flow growth, to 69 cents per share. That was nicely above Mizuho's estimate of 64. ETP raised its quarterly distribution 3% quarter on quarter to 56.5 cents per unit. Its distribution coverage -- a measure of ability to pay its 13.4% yield -- slipped to 1.13x from 1.18x in the second quarter of 2017, but was ahead of 1.1x in the third quarter of 2016 according to Mizuho's analysis.
 
ETE, whose yield is 6.6%, pays distributions to the general partner; it raised its quarterly distribution 4% quarter on quarter to 29.5 cents per unit, with distribution coverage of 1.05%.
 

Zarahn has a $26 price target on ETP and a $21 price target on ETE. Lower commodity prices and higher borrowing costs are among the risks for each. Here's Zahahn's caveat is on timing: "Our price targets imply more upside for ETP than ETE. However, we wrestle with the same question investors ask us repeatedly, 'when will ETP work?' "