Enterprise Products partners presentation

1. Enterprise Products Partners (NYSE: EPD)

The largest and most valuable MLP doesn’t boast the sexiest statistics. The yield is a pedestrian 4.2 percent and is growing at barely more than 6 percent a year, at a time when others are advertising distribution growth rates of 20 or even 30 percent.

Management recently said distribution growth won’t be stepped up this year notwithstanding ample financial flexibility to do so. Nor does Enterprise sound ready to get bigger via an acquisition, opting instead to boost its spending on organic growth projects by 20+ percent.

But look under the hood and the premier NGL shipper and processor is a profit machine that’s managed to grow its huge revenue base 12% organically last year. Its pipelines are contracted for dramatically stronger volumes in the years ahead under 10-year ship-or-pay fixed contracts. Enterprise is also taking advantage of the domestic hydrocarbon glut by expanding its market-leading liquefied petroleum gas export capacity and petrochemical production.

Its conservative financial policies make it by far the safest investment in the sector, and there is no longer a separate general partner to siphon off the benefits of the strong growth that is coming. The unit price has moved relentlessly higher, outperforming the benchmark MLP index by widening margins the last four years. Yet the partnership  is hardly overpriced relative to the sector or to scale of its opportunities. Buy EPD below the increased maximum of $75.

Magellan Midstream Partners presentation

2. Magellan Midstream Partners (NYSE: MMP)

The refined products and crude shipper is in the sweet spot of the economic cycle, seeing robust and profitable gasoline and diesel volumes thanks to higher demand. It’s also strategically positioned to ride the new US oil boom as a key shipper of Permian production to the Houston area, where its network offers the best access to a multitude of refineries.

Margins are rising briskly alongside revenue, leading Magellan to forecast 20 percent distribution growth this year and 15 percent in 2015, on the heels of 17 percent last year. And while the current yield is modest, the growth is excellent as is the margin of safety, with plenty of excess distribution coverage and low debt leverage. Fee-based shipping contracts account for 85 percent of the profit, shifting most of the commodity risk onto customers. We were too conservative in raising our buy target following last month’s strong earnings. Buy MMP below $77.

Source: Energy Transfer presentation

3. Sunoco Logistics Partners (NYSE: SXL)

This rival of Magellan in transporting Permian crude to the Gulf Coast has other strengths of its own, notably in new pipelines bringing natural gas liquids from the Marcellus to SXL’s  new export terminal  near Philadelphia, delivering ethane from the same region to processors in southern Canada and moving NGLs processed by affiliated partnerships near the Gulf Coast for shipment from its East Texas terminal.

The terminals and crude gathering segments, each accounting for a little more than a quarter of recent profits, enjoy synergies with the partnership’s crude pipelines but also provide diversification. Like Magellan, Sunoco Logistics is profiting from the domestic crude and gas drilling revival, financing a heavy slate of related projects largely with debt.

There’s plenty of scope for that because here too debt leverage is low and distribution surplus among the sector’s largest. And while returns from these growth initiatives will have to be shared with general partner Energy Transfer Partners (NYSE: ETP) , the near-term reluctance to finance with equity will limit dilution. Distributions are set to grow 22 percent for a third straight year, with no slowdown in sight. Buy SXL below the newly increased maximum of $91.

Source: Energy Transfer presentation

4. Energy Transfer Equity (NYSE: ETE)

After growing the affiliated Energy Transfer Partners (NYSE: ETP) into the premier natural gas shipper, billionaire co-founder and CEO Kelcy Warren went on an acquisition binge just as rise of new shale production began to sap ETP’s growth a few years ago.  Buying Sunoco  (including the assets now held by Sunoco Logistics) was one such smart move, diversifying Energy Transfer into crude at a price that looks dirt cheap less than two years later. But, perhaps even more shrewdly, Warren also bought the Southern Union  Company in 2011 for $4.2 billion in stock at a modest premium, and with it the Trunkline liquefied natural gas terminal in Lake Charles, Louisiana.

That site has now been approved for a major LNG export project, with Energy Transfer’s partner, BG Group (NYSE: BG), assuming nearly all the risks and Energy Transfer locking in an attractive guaranteed rate of return for 30 years, while also ginning up lots of additional fees carrying the needed gas to the site. By the time exports ramp up to full capacity in 2021, ETE and ETP should see nearly $1.2 billion in annual cash flow from the project directly, with ETE’s lion share equaling all of last year’s distributable cash flow. ETE’s valuation is up 28 percent since those figures were released not quite four months ago, which hardly accounts for all of the upside.

In fact, investors won’t need to wait for the LNG exports to start, to see dramatic increases in earnings power and annual distribution growth of 15 percent up so, up from 9 percent currently. Further growth at ETP, Sunoco Logistics  and another operating affiliate, Regency Energy Partners (NYSE: RGP) will do the trick, and recent acquisitions by Regency will only hasten the process as will other deals likely in the months and years ahead.

And every share issued by these subsidiaries will increase ETE’s haul via incentive distribution rights, Meanwhile, ETE is spending $1 billion to buy back its own units under a recent authorization. Warren owns a 17 percent stake in ETE, accounting for the bulk of his wealth, and he’s a proven rainmaker. Buy ETE below $52.

Source: Williams presentation

5. Williams (NYSE: WMB)

The big natural gas gather, shipper and processor is ideally placed to bring the increasingly abundant natural gas from the Marcellus and the Utica to utility and industrial customer up and down the Atlantic seaboard, into the fast-growing Southeast and onward to its own petrochemical facilities in Louisiana.

While Williams is not an MLP itself it sponsors one in Williams Partners (NYSE: WPZ), the source of accelerating cash distributions via incentive distribution rights. Williams also owns 50 percent of the general partner interest and incentive distribution rights, along with 23 percent of limited partner units,  in another thriving Northeast gathering partnership, Access Midstream Partners (NYSE: ACMP). Canadian oil sands processing infrastructure, gathering pipelines in the Gulf of Mexico and gathering and processing systems in the Rockies along with a pipeline link to the Pacific Northwest round out a strong, diversified portfolio.

Gross margin is expected to increase 36 percent in the next two years, spurred by increased ethylene production and higher gathering fee receipts, as well as higher distributions from affiliates. The dividend yield is approaching 4 percent, and growth in the payout is expected to continue accelerating to 22 percent this year. Two activist hedge funds looking to further boost returns have just been granted board seats. Buy WMB below $46.

Source: Targa Resources presentation

6. Targa Resources (NYSE: TRGP)

Like Williams, Targa is an incorporated general partner to an MLP, in its case another one of our portfolio recommendations, Targa Resource Partners (NYSE: NGLS).  The company specializes in gathering and processing NGLs, and if that is starting to sound like a major theme, it is, because NGLs processed into liquefied petroleum gases like propane and butane offer a ready export outlet for the domestic shale bounty.

Nearly half the profits come from gas gathering and processing in Texas, Louisiana and North Dakota, and another 35 percent from the logistics segment that includes valuable fractionators in Mont Belvieu, Texas and a major nearby LPG export terminal. Exports from Targa’s Galena park facility doubled last year, aided by the completion in September of the first phase of a major capacity expansion project.

Incentive distribution rights from NGLS helped Targa increase its modest dividend 33 percent last year, and forecast a 25+ percent increase in 2014. Galena Park and the nearby fractionators are a valuable strategic asset likely worth a lot more than their book value. Buy TRGP below $105.   

Source: EQT Midstream presentation

7. EQT Midstream (NYSE: EQM)

The  gas transmission MLP sponsored by leading Marcellus driller EQT (NYSE: EQT) has grown rapidly alongside its parent, and its unit price has tripled as a result in less than two years since EQM’s initial public offering. Gas transmission under long-term fixed-fee contracts accounts for the bulk of current revenue, but numerous nearby EQT gathering systems present lots of attractive dropdown opportunities. So far, the sponsor has helped EQM expand rapidly without incurring long-term debt. The distribution increased 31 percent last year and is forecast to jump another 29 percent in 2014. EQT continues to own more than 42 percent of EQM’s limited partner units, giving it  a big stake in the MLP’s success. Buy EQM below $70. 



Source: EnLink presentation

8. EnLink Midstream (NYSE: ENLC)

The new combination of Devon Energy’s (NYSE: DVN) midstream assets with those of Crosstex Energy (formerly XTEX and XTXI)  seeks to duplicate EQM’s success as a sponsored midstream operator on a much wider scale, including the core of Devon’s acreage in the Mid-Continent. Like EQM, the operating affiliate EnLink (ENLK) and its general partner ENLC start out with little financial leverage and therefore great flexibility to grow both the operation and the distributions. The incorporated ENLC  is expected to increase its modest dividend 63 percent this year based on its dramatically expanded asset base, while its affiliate will derive 95 percent of its profit from fee-based arrangements. ENLK will also owe generous incentive distribution rights to ENLC. Buy ENLC below $40.

Source: AmeriGas Partners presentation

9. AmeriGas Partners (NYSE: APU)

The leading domestic propane distributor recently took over one of its largest competitors in an industry where the economies of scale are as significant as the barriers to entry. Many of its customers have few alternatives to propane as their fuel. As a result, AmeriGas has steadily increased its unit margins through a variety of pricing environments for the underlying commodity. These now top $1 per gallon, supporting an 8 percent distribution yield and 5 percent distribution growth. The partnership has recently added to its roster of national accounts while promoting a successful summertime grilling  cylinder exchange program at participating retailers. Buy APU below $51.