Investors should use the current weakness as an opportunity to buy select MLPs and other energy stocks, Baird analyst Ethan Bellamy believes, as he remains “long-term bullish” on oil prices since he thinks near-term oversupply will be supplanted by undersupply.
Among MLPs, Bellamy prefers Plains All American Pipeline (PAA, PAGP) and Energy Transfer (ETE, ETP) given large liquids upside exposure.
In E&Ps, he likes SM Energy (NYSE:SM), WPX Energy (NYSE:WPX), Pioneer Natural Resources (NYSE:PXD) and Larado Petroleum (NYSE:LPI), which all hold positions in the low-cost Permian.
For traders with a short-term horizon, Bellamy "would hide in natural gas," particularly Antero Resources (NYSE:AR) and Antero Midstream Partners (NYSE:AM).
He hedges his bets, however: "If the Saudis once again abrogate their cartel role, electing to forego the Aramco IPO until 2019, oil could remain under pressure into 2018 given still-bloated inventories."
Plains GP Holdings (NYSE:PAGP) -1.5% premarket after announcing an upsized public offering of 42M common shares for $1.3B in gross proceeds, with an underwriters option to purchase up to an additional 6.3M shares.
PAGP says it will use the proceeds to purchase from Plains AAP a number of AAP class A units equal to the number of PAGP shares sold; AAP then will use the proceeds to purchase from Plains All American Pipeline (NYSE:PAA) an equivalent number of PAA common units.
Plains All American Pipeline (PAA -0.1%) and Plains GP (PAGP +0.5%) are upgraded to Outperform from Neutral at Baird, which says recoveries in volume and supply and logistics are in sight.
Baird views Plains' $1.2B ACC crude system acquisition as an "opportunistic maneuver" while the Delaware is still in its early phase, and sees sufficient production growth to spur a recovery in supply and logistics by mid-2017 even under its base case; the firm raises its price targets for PAA to $37 (5.9% yield) from $32 and for PAGP to $39 (5.6% yield) from $34.
Baird also raises its price target on Outperform-rated Targa Resources (NYSE:TRGP) to $65 from $55, as it expects the stock to re-rate upward given its discount to c-corporation peers.
Plains All American Pipeline (PAA -2.9%) and Plains GP (PAGP +0.3%) are initiated with Neutral ratings (I, II) and respective price targets of $34 and $35 at Mizuho, which says visibility is supported by rising Permian crude oil volume, contributions from contracted organic projects and a low cost of capital from corporate simplification.
The firm notes PAGP's healthy 6.8% dividend yield and Permian crude oil infrastructure exposure through a C-corp structure, which deserves a modest premium to PAA, but its enthusiasm is tempered by valuation, leverage and competition.
Mizuho thinks part of the Permian growth story is baked into PAA and PAGP, which have risen by a respective 67% and 57% over the past year.
Pres. Trump makes it official, signing executive orders to move forward with the Keystone XL (TRP +3.7%) and Dakota Access (ETP +4.2%) pipelines, with the caveat of using American-made steel and pipes for the pipelines.
Two of five executive orders signed by Trump aim to revive and probably expedite review processes, while three executive orders call for streamlining permitting processes for infrastructure projects, expediting environmental reviews of such projects and calling for all pipelines built in the U.S. to be made with U.S. steel.
Plains All American Pipeline (PAA -1.5%) is upgraded to Overweight from Equal Weight, and ONEOK (OKE -3.9%) is downgraded to Equal Weight from Overweight at Morgan Stanley.
PAA looks attractive, “given its Permian basin positioning, with dominant gathering market share and underutilized assets that will benefit from increasing Permian crude production,” Stanley says, expects that by 2019 PAA will generate twice the EBITDA growth from additional capacity utilization than reflected by current consensus estimates.
Valuations on near-term cash flows limits upside for OKE, the firm says, while noting that the company's fundamentals remain healthy, and it is optimistic about the coming natural gas liquids cycle in 2018-20.
The firm's stock price targets are $37 for PAA and $50 for OKE, while it also maintains an Equal Weight rating and $14 target on Plains GP Holdings (PAGP -0.2%).
Energy MLPs enjoyed a lift this week (at least until yesterday) following news of the Enbridge-Spectra merger, particularly those lacking sponsorship by producers that may be targets for consolidation.
FBR Capital says MLP valuations have improved ~45% from lows reached early this year, and expects macro trends to lift the sector; the firm thinks CAPL could enjoy double-digit growth for nearly seven years, and says MMLP is another notable outperformer whose valuation reflects more than enough discount for a distribution cut (which the firm is forecasting) - it also likes ENLK, EEP, TLP, SRLP, USAC, WLKP and USDP,
RBC notes favorable sentiment in the MLP realm, highlighting attractive valuations particularly at ETP, BWP and AMID, and sees dropdown stories - out of favor YTD - such as VLP and SHLX offering visible growth that can support the stocks over the next 12 months.
Sentiment is improving and "recovery emerging” around energy MLPs, Citi's Faisel Khan says, citing Improving commodity prices and tighter credit spreads as the main reasons, as some companies are positioning for volume growth.
Khan's "key thematic picks" are Energy Products Partners (NYSE:EPD), as a play on growth in natural gas liquids, Plains All American Pipeline (NYSE:PAA) and Plains GP Holdings (NYSE:PAGP) on growth in the Permian basin, and EnLink Midstream (NYSE:ENLC), as a play on Oklahoma expansion.
PAA’s agreement with PAGP affiliate Plains AAP LP eliminates PAA’s incentive distribution rights and economic rights associated with PAA’s 2% general partner interest, in exchange for 245M newly issued PAA common units and the assumption of all of AAP’s outstanding debt.
The firm says the terms are much as it expected, materially reducing the risk to PAA's investment grade rating, and that the simplification is welcome news for investors.