Portfolio Update

• Alliance Holdings (NASDAQ: AHGP) added to Aggressive portfolio, buy below $23
• Alliance Resource Partners (NASDAQ: ARLP) added to Aggressive portfolio, buy below $18
• AmeriGas Partners (NYSE: APU) downgraded to Hold in Growth portfolio
• Antero Midstream Partners (NYSE: AM) upgraded to #5 Best Buy below $30 in Growth portfolio
• Archrock Partners (NASDAQ: APLP) upgraded to Buy below $14 in Growth portfolio
• Blackstone Group (NYSE: BX) upgraded to Buy below $28 in Growth portfolio
• Boardwalk Pipeline Partners (NYSE: BWP) downgraded to Sell in Aggressive portfolio
• Columbia Pipeline Group (NYSE: CPGX) downgraded to Sell in Growth portfolio
• DCP Midstream Partners (NYSE: DPM) upgraded to Buy below $36 in Aggressive portfolio
• Energy Transfer Partners (NYSE: ETP) downgraded to Hold in Growth portfolio
• Enterprise Products Partners (NYSE: EPD) buy limit increased to $33 in Conservative portfolio
• Genesis Energy (NYSE: GEL) buy limit increased to $42 in Growth portfolio
• PBF Logistics (NYSE: PBFX) downgraded to Hold in Growth portfolio

AmeriGas Partners (NYSE: APU) reported second-quarter declines of 13-14% in its propane distribution volumes and earnings, in line with the second warmest winter on record. It lowered its annual profit forecast by 13% as well, and raised its distribution by just 2.2% year-over-year, roughly half the prior rate. Even so annual coverage will shrink to 1.07x, short of the 1.2x long-term target. AmeriGas could benefit if weather reverts to norm, and even more so if the next winter is unusually cold due to La Nina. But some of its recent margin gains will be at risk should wholesale prices continue to rebound. After a strong May the unit price is down 7% so far in June, and right back where it traded last Halloween before the winter fizzled. The annualized yield stands at 8.8%. Growth pick APU, until now the #5 Best Buy, is downgraded to a Hold, but it’s a comfortable hold at this yield level.

Antero Midstream Partners (NYSE: AM) continued to benefit from its sponsor’s rapid production growth in the Marcellus, producing 1.6x coverage on a distribution set to increase 30% this year. Next year’s comparable growth rate should benefit from the sponsor’s acquisition last week of a net 55,000 acres of leases in the southwestern Marcellus core, almost all of which will be dedicated to Antero Midstream. The annualized yield stands at 3.8% with the unit price 41% above its January low. Growth pick AM is upgraded to a #5 Best Buy below $30.

Archrock (NYSE: AROC) is up 23% in the four weeks since our upgrade, though it remains among the worst portfolio performers since the energy slump hit. That’s pushed the annualized yield based on the recently reduced dividend down to 4.6%. The general partner to a compression services MLP (discussed below) should reclaim its recently surrendered incentive distribution payments over time as industry spending recovers. Aggressive pick AROC is a Buy below $9.

Archrock Partners (NASDAQ: APLP) has surrendered the gains forged in the wake of its own distribution cut last month. The unit price is down 21% since May 25, pushing the annualized yield back up to 9.2%. As noted last month, APLP recently generated more than twice the cash flow needed to sustain its reduced payout. Growth pick APLP is upgraded to a Buy below $14.

Blackstone Group (NYSE: BX) reported a 69% year-over-year drop in first-quarter distributable earnings, as turbulent markets limited its funds’ opportunities to cash out. But assets under management grew 11% year-over-year to an industry-leading $344 billion, despite $48 billion of realizations and redemptions. The leading private-equity firm paid a variable quarterly distribution of $0.28 per unit, for a yield of 8.4% based on the payouts over the last year. Just as the most recent dividend understates Blackstone’s long-term profitability, a unit price down 40% over the last year doesn’t come close to reflecting the value of this business. Growth pick BX is upgraded to a Buy below $28.

Boardwalk Pipeline Partners (NYSE: BWP) posted a 9% year-over-year increase in first-quarter EBITDA, helped by a recent tariff increase and the restart of an idled ethylene pipeline. Leverage declined from 5.3x debt/EBITDA a year ago to 4.7x as a result of the drastically downscaled distribution, but is set to rise again this year as the partnership ramps up spending on growth projects. These will be needed to offset the potentially costly crush of long-term natural gas transmission contract expirations in 2018-19. While those arrangements continue to produce steady revenue, transmission volumes were recently down 10% year-over-year, signaling significant renewal risk. We’re banking the gains since recommending Boardwalk two years ago in the wake of its distribution cut. Sell Aggressive pick BWP.   

Buckeye Partners (NYSE: BPL) posted a 15% increase in first-quarter distributable cash flow, as the growth of its South Texas crude logistics venture and strong oil and fuel demand more than offset lower fuel pipeline volumes. Those were hurt by unseasonably warm weather and the gas drilling slump in the Northeast, which reduced demand for heating oil and diesel. The results provided 1.14x coverage on a distribution increased 4.3% year-over-year in line with the recent trend. The coverage is likely to dip for the balance of the year, but to continue to fully cover the payout, and leverage is manageable at 4.5x debt/EBITDA. Units currently yield 6.9% after trading in a range since early March, and are up 6% year-to-date. Growth pick BPL is a Hold.

Cedar Fair (NYSE: FUN) reported strong first-quarter results, though only one of the partnership’s 11 amusement parks was open during a period that typically accounts for less than 5% of its annual revenue. Management continued to be encouraged by the early-season trends, notably advance sales running 14% ahead of the deferred revenue collected as of March last year. This year’s attendance will be boosted by a strong jobs market and relatively cheap gas, as well as a landmark new rollercoaster at the flagship Cedar Point park in Ohio. Cedar Fair continues to find creative ways to increase the attendance at its parks, most recently by developing amateur sports complexes next to its parks to bring youth teams and families within sight of its rides. Units yield 5.6% and have appreciated 19% from their February low. The distribution has increased 10% in a year’s time. Growth pick FUN is a Hold.

Columbia Pipeline Group (NYSE: CPGX) announced the early termination by the U.S. Federal Trade Commission of the antitrust waiting period for its proposed sale to TransCanada (NYSE: TRP). The news cleared the way for a June 22 shareholder vote on a deal providing $25.50 in cash per CPGX share. If approved at that meeting, the buyout is expected to be concluded by July 1. With shares trading within pennies of TransCanada’s offer, Growth pick CPGX is a Sell.

CONE Midstream Partners (NYSE: CNNX) was designated a Best Buy and its buy limit was increased last week after the Marcellus gas gathering MLP reported strong first-quarter results. The amply covered distribution rose 15% year-over-year, and yields an annualized 5.8%. The unit price has rallied 30% since our April 16 Buy recommendation. Growth pick CNNX is the #6 Best Buy below $20.

DCP Midstream Partners (NYSE: DPM) reported upbeat first-quarter results, as resilient gas intake volumes and increased traffic on its natural gas liquids pipelines lifted distribution coverage to 1.36x for the period and 1.24x for the trailing 12 months. The unit price has more than doubled from its February lows, reclaiming levels from a year ago but is still at barely half its 2014 highs. The current annualized yield is at 9.4%, and despite the improved coverage and relatively low leverage (3.2x debt/EBITDA) management offered no timeline for the resumption of distribution growth. With no large capital products pending, DCP Midstream is looking to capitalize on opportunities to supply ethane to new petrochemical plants and processing facilities.  Aggressive pick DPM is upgraded to a Buy below $36.

Delek Logistics Partners (NYSE: DKL) has provide no updates since a first-quarter report that flagged the imminent loss of the bulk of the revenue from the Paline crude pipeline, which accounted for 19% of the refinery logistics partnership’s recent profits. Nor has it offered a timeline for a planned dropdown of some of the sponsor’s filling stations. The yield is up to 9.5% with the unit price down 21% since the May 5 quarterly report. After downgrading this longtime Best Buy last month we remain cautious on its near-term prospects. Growth pick DKL is a Hold.

Energy Transfer Equity (NYSE: ETE) continues to back away from an agreement to buy Williams (WMB) that it now regrets, pending the outcome of a June 20-21 trial in Delaware Chancery Court over the two companies’ mutual recriminations. Energy Transfer is arguing that the merger can’t close because its law firm cannot provide assurances that the equity exchange comprising the bulk of merger consideration will be a tax-free one as initially planned. It has also accused Williams of failing to use its best efforts to complete the merger by challenging the private offering effectively protecting ETE insiders from a distribution cut. Projections provided by Energy Transfer to Williams in April assume that if the merger does close ETE will suspend subsequent distributions to safeguard its MLP affiliates’ investment-grade credit ratings, resuming them at a reduced level in March 2018. That would lower the combined company’s consolidated leverage from an estimated 6.8x debt/EBITDA at the end of 2016 to 5.4x two years later (and 3.7x on a standalone basis for ETE.)  The risk of a distribution cut has been well advertised for months and is likely fully factored into ETE’s deeply discounted valuation. Unlikely as it now seems, a last-minute deal between the companies replacing the $6 billion cash portion of the merger consideration with additional equity would likely propel the unit price higher. For now, the quarterly distribution paid on May 19 works out to an annualized yield of 8.8% based on a unit price that’s more than tripled from its February low but remains down 63% over the last year. Growth pick ETE remains the #1 Best Buy below $15.

Energy Transfer Partners (NYSE: ETP) reported disappointing distribution coverage for the second quarter in a row, earning just 86% of its quarterly payout mostly as a result of a rising unit count, higher repayments owed to its general partner and a reduction in its own receipts from affiliates. “We continue to evaluate our distributions on a quarterly basis and we’ll be prudent as it relates to balancing coverage and liquidity with distributions,” the chief financial officer noted on the earnings conference call. In a May securities filing related to the merger based on the information provided by Energy Transfer, Williams said Energy Transfer Equity is planning to financially aid its MLP affiliates so that they can maintain current distribution levels and investment-grade credit ratings. Based on a first-quarter payout (which was kept level with the prior quarter’s distribution) ETP units currently yield 10.9%. The unit price has doubled from its February low but remains down 43% since late 2014. After exceeding its most recent buy limit, Growth pick ETP is downgraded to Hold.

Enterprise Products Partners (NYSE: EPD) reported flat EBITDA vs a year earlier in the first quarter, as growth in liquids pipeline volumes offset declines in gas transportation and petrochemical margins as well as last summer’s sale of offshore pipeline interests. The cash flow provided 1.28x coverage on a distribution increased 5.3% year-over-year. Units now yields an annualized 5.7% after rallying 40% from the winter lows, though they remain down 30% since late 2014. On the conference call, management sounded bullish on the medium-term outlook for energy prices and midstream margins, Enterprise continues a rapid buildout of its infrastructure, including two gas processing plants and an ethane export terminal set to come online this year, followed by a big polyethylene plant in 2017. Leverage is reasonable at 4.2x debt/EBITDA.  Conservative pick EPD is the #3 Best Buy below the increased limit of $33.

Genesis Energy (NYSE: GEL) reported an increase of roughly 50% in first-quarter distributable cash flow, driven largely by last summer’s acquisition of offshore pipeline interests in the Gulf of Mexico. Despite weakness in marine shipping and refinery services, distribution coverage reached 1.32x on a payout increased 10% year-over-year. Genesis expects those headwinds to diminish in the coming months while offshore pipeline volumes continue to increase, enabling it to begin paying down debt currently at 5.1x EBITDA. Units yield 7.2% after rallying 82% from February’s low. Growth pick GEL is a Buy below the increased limit of $42.

Magellan Midstream Partners (NYSE: MMP) blamed the 12% drop in its first-quarter distributable cash flow on reduced butane blending margins and the timing of maintenance spending, partially offset by higher crude pipeline profits. It still managed 1.28x coverage on a distribution it expects to increase 10% this year, followed by growth of “at least” 8% in 2017. The yield is back down to 4.3% after a 30% rebound in the unit price from February’s low, which has left it just 16% shy of the 2014 record high. Debt/EBITDA has crept up to 3x and is expected to go higher this year as Magellan puts new fuel and crude pipelines into service, but is expected to remain “well short” of 4x, even as the partnership continues its multi-year stretch of not issuing new equity. Conservative pick MMP is the #2 Best Buy below $80.

PBF Logistics (NYSE: PBFX) reported an 11% increase in in its first-quarter distributable cash flow, providing coverage of 1.29x on a distribution grown 20% in a year’s time. The three-year-old refinery logistics MLP recently passed three key milestones: a successful first secondary offering in March, the retirement of its founder and chairman, refining industry icon Thomas O’Malley in May, and in between the closing of its purchase of four East Coast fuel storage terminals from Plains All American (NYSE: PAA), the partnership’s first third-party acquisition. The terminals will help the partnership diversify away from crude-by-rail operations that have become much less profitable since the crude crash, leaving in doubt the renewal prospects of related contracts with its sponsor that expire in five to seven years. But in the meantime sponsor PBF Energy (NYSE: PBF) has recently acquired two additional refineries, expanding the inventory of assets it can sell to PBF Logistics. Given the refining industry’s recent struggles it’s notable that PBFX increased its quarterly distribution by a penny per unit sequentially, rather than two cents as in the four prior quarters. Still, the current yield is an appealing 7.6% despite the 17% capital gain since the March 31 secondary. Growth pick PBFX, formerly a Best Buy, is downgraded to Hold.

Williams (NYSE: WMB) continues to trade at a sizeable discount to the nominal value of Energy Transfer Equity’s contested merger bid ahead of the June 20-21 trial meant to resolve the dispute between the parties. The merger deadline is June 28 and Williams shareholders have until June 24 to choose between cash, equity or a combination of the two as payment for their shares. Given the decline in ETE’s unit price since the merger deal was struck, cash is by far the highest-value option and the only sensible choice, even if prorating will effectively limit cash payouts to $8 per WMB share if the deal is completed. Williams has said it will cut or eliminate its dividend if the merger falls through, though that could change if the company wins significant damages. For now, the stock yields an annualized 11.4% based on a quarterly dividend due to be paid on June 27. Williams’ board has recommended that shareholders vote in favor of the deal, and that’s the prudent course given the large penalty Williams could owe if they reject it. Three former Williams chief executives are lobbying for a No vote, and have claimed that five current directors including the CEO also oppose the merger. We advise investors to vote in favor of the deal to preserve the company’s legal rights. Williams shareholders who return an election form specifying their preferred merger compensation will be barred from selling after the submission deadline until the merger is completed or canceled. In other merger-related news, Energy Transfer and Williams have accepted the Federal Trade Commission’s demand that combined company sell Williams’ 50% stake in the Louisiana-to-Florida Gulfstream natural gas pipeline as an antitrust condition. Aggressive pick WMB is a Buy below $23.