Oil Is Breaking Out -- Profit With These 3 MLPs

Adam Fischbaum's picture

Monday, March 19, 2018 - 2:30pm

by Adam Fischbaum

Last year, I wrote a somewhat bearish article on the long-term price of oil. While I am sticking to my guns long-term, a recent research piece published by Confluence Investment Management's Bill O'Grady (one of the best energy analysts) sets a near-term bullish tone for the price of crude and natural gas.

O'Grady suggests that oil prices remain steady thanks to "OPEC production discipline and solid global oil demand". Based on his firm's methodology, he suggests a fair value price of $72.49. Looking at a recent chart of the price action for West Texas Intermediate (WTI), I would have to agree.

As the first quarter of 2018 ends, crude has traded in a 10-point range. If O'Grady's forecast is accurate, it would suggest a near-term upside of 18% -- not bad for an asset that will be range-bound for the near future.

Natural gas may be going along for the ride as well. After a significant pullback, it looks as though the commodity has bottomed.

So how do investors play this short-term trend? One of the best ways would be in the master limited partnership (MLP) space. I've identified three names in the space trading at attractive discounts while throwing off above average yields.

Energy Transfer Partners LP (NYSE: ETP)
Formerly Sunoco Logistics Partners, ETP focuses on transport and storage of crude oil, refined products, and natural gas liquids (NGLs). Headquartered in Texas (where else?), ETP manages a portfolio that includes more than 71,000 miles of pipeline as well as marketing services.

With a market cap of over $21 billion, ETP trades at just 80 cents on the dollar to its book value and just 70 cents on the dollar to its annual revenue of over $29 billion. Units trade near $16.60, a 33% discount to their 52-week high, and carry a yield of 13.6%.

Genesis Energy LP (NYSE: GEL)
Billing itself as a "growth-oriented master limited partnership," GEL concentrates its efforts on providing services around and within refineries primarily located on the Gulf Coast. Management is committed to logical double-digit growth as well as strengthening its distribution coverage. At $20.80 per unit, GEL yields 11.8% and trades at a nearly 40% discount to its 52-week high.

Buckeye Partners LP (NYSE: BPL)
Tracing its roots back to John D. Rockefeller's 19th century Standard Oil trust, BPL covers an asset base that includes 6,000 miles of pipeline, 135 liquid storage facilities with a capacity of over 176 million barrels, and international reach that includes the Caribbean, Europe, the Middle East, and Southeast Asia. At around $43.80, Buckeye's units trade at a deep 37% discount to their 52-week high and throw off an 11.5% yield.

Risks To Consider: Just as I was in the middle of writing this article, the Federal Energy Regulatory Commission (FERC) handed down a ruling that MLPs can no longer receive a credit for income taxes they don't pay. Investors have historically owned MLPs because of the higher returns available from the pass-through status they have enjoyed. As pass-through entities, MLPs don't pay federal taxes.

While the MLP market was pulled down immediately by this ruling, it's unclear how and if the sector will be affected. Many MLP companies have already announced the anticipated impact. The three covered here have released statements stating that no material impact is expected.

Speaking of taxation, MLPs issue K1 partnership returns rather than the traditional 1099-S. Accountants typically hate the additional paperwork and tend to let their clients know this is the case. For those wanting to avoid the K1 headache, plenty of choices abound in the closed-end and exchange-traded fund space. One of my favorites is the Center Coast Brookfield MLP and Energy Infrastructure Fund (NYSE: CEN). At $9.10, the fund trades at a 30% discount to its 52-week high and yields 13.8%.

Action To Take: The recent selloff in the MLP space combined with a breakout in energy prices offers investors an excellent near-term opportunity. On average, these three MLPs trade at a 36% discount to their recent highs and yield a blended 12.3%. As energy prices approach fair value and the marketplace sorts out the impact of the FERC ruling, price recovery combined with yields should deliver 12- to 18-month returns in excess of 20%.

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Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.