Energy MLPs have been subject to indiscriminate selling this week as crude oil prices plunge, and while RBC Capital analyst John Ragozzino would not step into the sector in a big way right now, he thinks investors already in the group should ride out the storm - depending on their oil price exposure.
Many energy MLPs, especially pipelines, are less correlated to commodity prices than other energy investments, but more MLPs with cyclical oil and gas price exposure are now part of the mix, and some investors have been selling without regard for the relative quality of specific stocks, Ragozzino says.
The analyst believes there is minimal risk to reduction in 2015 distributions; with commodity price hedging, he thinks MLPs on average will feel some pain, but can handle oil prices as low as $80/bbl.
Ragozzino says the MLPs most highly levered to a sustained drop in crude prices are MidCon Energy Partners (NASDAQ:MCEP), LRR Energy (NYSE:LRE) and Legacy Reserves (NASDAQ:LGCY); names least exposed include Atlas Resource Partners (NYSE:ARP), Vanguard Natural Resources (NASDAQ:VNR) and EV Energy Partners (NASDAQ:EVEP).
RBC points out in a new report that hawkish Fed commentary has tapped the brakes on MLPs to start Q3 after a strong first half of 2014, but the firm continues to view the fundamental backdrop for MLPs as highly attractive for investment.
UBS sees opportunity ahead for energy MLPs, believing some of the "issues" that have clouded prospects - including negative scrutiny about practices at Linn Energy (LINE) and LinnCo (LNCO) which cast a cloud over the upstream MLP group - will fade.
Many risk factors are priced in at current levels, and there are some valuation opportunities, the firm says.
Mid-Con Energy Partners (MCEP) wins UBS accolades on its higher distribution potential and limited exposure to downside scenarios; other top picks are BreitBurn Energy Partners (BBEP) and LRR Energy (LRE).
UBS actually awards LINE a Buy rating, along with QR Energy (QRE); it's neutral on Legacy Reserves (LGCY), LNCO and Vanguard Natural Resources (VNR).
MLPs typically return ~90% of their income to unitholders, and a new report from Oppenheimer suggests some MLPs may have a tough time doing that; some companies are way too aggressive and may be forced to cut their distributions if suitable acquisitions and capital are not available, the firm says.
Oppenheimer's top energy MLPs to buy: BreitBurn Energy Partners (BBEP), LRR Energy (LRE), Memorial Production Partners (MEMP), New Source Energy Partners (NSLP) and the more aggressive Mid-Con Energy Partners (MCEP).
MLP stress is far less prevalent on the leading large cap names, such as Enterprise Products Partners (EPD), Kinder Morgan Partners (KMP), Plains All American (PAA) and Energy Transfer Partners (ETP); all have consistently raised their distributions over the years and appear likely to continue to do so.
Oppenheimer restarts coverage of energy MLPs, bullish on the asset class as a whole; the firm shows a bias in favor of investing in higher distribution growth, even if the yields are lower, and for owning general partners due to their incentive distribution rights structure.
Started at Outperform: EQT Midstream (EQM +2.1%), Seadrill Partners (SDLP +0.7%), Tesoro Logistics (TLLP +1.6%), Memorial Production Partners (MEMP +2.4%), Western Gas Partners (WES +0.4%), Western Gas Equity Partners (WGP +0.7%).
Started at Market Perform: Williams Partners (WPZ), Crosstex Energy (XTEX), ONEOK Partners (OKS), Genesis Energy (GEL).
Also: New Source Energy (NSLP), Breitbrun Energy Partners (BBEP), LRR Energy (LRE), Mid-Con Energy Partners (MCEP).
Mid-Con Energy Partners LP owns, operates, acquires, exploits and develops oil and natural gas producing properties in North America. The Company's properties are located in the Mid-Continent region of the United States.