Portfolio Update

• Alliance Holdings (NASDAQ: AHGP) buy limit increased to $27 in Aggressive Portfolio
• Alliance Resource Partners (NASDAQ: ARLP) buy limit increased to $22 in Aggressive Portfolio
• Archrock (NYSE: AROC) downgraded to Hold in Aggressive Portfolio
• Archrock Partners (NASDAQ: APLP) buy limit increased to $17 in Growth Portfolio
• Blackstone Group (NYSE: BX) buy limit increased to $34 in Growth Portfolio
• Buckeye Partners (NYSE: BPL) upgraded to a Buy below $80 in Growth Portfolio
• Cedar Fair (NYSE: FUN) upgraded to a Buy below $65 in Growth Portfolio
• CONE Midstream Partners (NYSE: CNNX) buy limit increased to $24 in Growth Portfolio
• Enbridge Energy Partners (NYSE: EEP) added to Growth Portfolio below $30. See New Buys
• Enbridge Equity Management (NYSE: EEQ) added to Growth Portfolio below $29. See New Buys
• Energy Transfer Equity (NYSE: ETE) buy limit increased to $22 in Growth Portfolio
• Enviva Partners (NYSE: EVA) buy limit increased to $29 in Aggressive Portfolio
• EQT GP Holdings (NYSE: EQGP) upgraded to a Buy below $30 in Aggressive Portfolio
• EQT Midstream Partners (NYSE: EQM) buy limit increased to $90 in Conservative Portfolio
• Fortress Investment Group (NYSE: FIG) downgraded to Sell in Aggressive Portfolio
• Genesis Energy (NYSE: GEL) downgraded to Sell Half in Growth Portfolio
• Macquarie Infrastructure (NYSE: MIC) buy limit increased to $88 in Growth Portfolio
• New Residential Investment (NYSE: NRZ) downgraded to Sell in Aggressive Portfolio
• Williams (NYSE: WMB) downgraded to Sell Half in Aggressive Portfolio
• Williams Partners (NYSE: WPZ) added to Growth Portfolio. Buy below $42. See New Buys

Alliance Holdings (NASDAQ: AHGP) has returned 22% since joining the Aggressive portfolio on June 20 but remains down 33% over the last year. It’s benefited recently from declining coal stocks at U.S. power plants and increased optimism about next year’s spot prices, as well as strong quarterly results posted by its operating affiliate ARLP. The rally has dropped the current annualized yield to 9.1%. AHGP is a Buy below the increased limit of $27.

Alliance Resource Partners (NASDAQ: ARLP) has returned 27% in the two months since we recommended it, getting a big boost from sequentially improved quarterly results.  Second-quarter distributable cash flow exceeded the first quarter’s by 42%, boosted by a 7% increase in coal volumes and a 9% decline in costs per ton. Cash flow coverage on a distribution reduced three months earlier was up to 2.3x and is expected to remain above 2 for the remainder of the year before declining to a range of 1.4-1.5x next as a result of lower sales volumes and prices. For more on AHGP and ARLP, please see last week’s update. Aggressive pick ARLP is a Buy below the increased limit of $22.

AmeriGas Partners (NYSE: APU) posted improved unit margins despite higher wholesale propane prices for its spring quarter, and backed its prior annual profit guidance. The propane distributor also refinanced $1.35 billion in outstanding debt, extending maturities by five years until 2024-26 while saving $5 million in annual interest expense. The unit price rallied 17% between mid-June and the end of July, but has since pulled back 10%. The annualized yield is at 8.3%. Growth pick APU is a Hold.

Antero Midstream Partners (NYSE: AM)  reported another impressive quarter, delivering 1.7x coverage on a distribution increased 32% year-over-year, in line with the planned growth rate through 2017. Operating costs came in below expectations even as volume growth remained strong, fed by the sponsor’s aggressive, well-hedged drilling program and constantly improving well performance. The unit price is down 5% since the end of June but still up 16% year-to-date, for a current annualized yield of 3.8%. Growth pick AM is the #2 Best Buy below $30.

Archrock (NYSE: AROC) reported improved second-quarter results, as dramatic cost cuts mitigated the toll of the reduced contracting demand for its gas compressors. After cutting its dividend three months ago and acknowledging extreme uncertainty about near-term business prospects management sounded much more optimistic this time out, predicting that contract cuts should slow during the remainder of this year and noting signs of renewed ordering interest as some drillers ramp up capital spending. The share price is up 72% since we upgraded AROC to Buy on May 19 in the wake of the dividend cut. With the annualized yield down to 3.3%, Aggressive pick AROC is downgraded to Hold.    

Archrock Partners (NASDAQ: APLP) posted a record high gross margin on the same cost cuts that propped up its sponsor’s results. The utilization rate for its contracted compressor fleet slipped from 88% to 84% over the last three months, but distributable cash flow rose, boosted by a heroic 60% year-over-year cut in maintenance spending. The distribution coverage on APLP’s recently reduced payout improved to 2.67x from 2.51x in the prior quarter. But distribution growth is unlikely to resume until a debt/EBITDA ratio pushing 5 gets back down to 4. The annualized yield is down to 7.9% while the unit price has gained 18% year-to-date. Growth pick APLP is a Buy below the increased limit of $17.

Blackstone Group (NYSE: BX) recently paid a quarterly distribution of 36 cents a unit, the product of a solid second quarter that saw the value of its investments rebound after a rocky winter. As usual, the leading alternative asset manager provided an array of numbers meant to shock and awe: $356 billion in assets under management, $266 billion earning fees, $98 billion in committed but as yet undrawn “dry powder.” As usual, Chairman and CEO Steven Schwarzman spent some of the conference call complaining about Blackstone’s low share price. Despite rebounding 21% since July 6, units still yield an annualized 5.2% based in the latest variable distribution and 6.2% from payouts over the last year. Management expects a “powerful upswing” in fee-related earnings next year based on strong fundraising over the last year. Growth pick BX is the #8 Best Buy below the increased limit of $34.

BP (NYSE: BP) is still down almost 5% since we recommended shares of the oil producer and refiner four weeks ago, though that doesn’t include the 60-cent dividend already deducted from the price that will be paid on Sept. 16. The stock has perked up a bit of late alongside oil prices but still yields an annualized 7%, though that yield is still largely debt-financed. It should be paid out of operating cash by next year at the current oil price based on management’s projections. Second-quarter results were predictably miserable, as detailed here.  Growth pick BP is a Buy below $42.

Buckeye Partners (NYSE: BPL) posted strong second-quarter results, distributable cash flow rising 26% year-over-year on the continuing buildout of crude processing facilities in southern Texas, high demand for crude and refined products storage and increases in pipeline tariffs. The distribution coverage improved to 1.15x on a payout that continued to grow at a 4% annual rate. That pace seems likely to improve only slightly next year as Buckeye prioritizes investment for continued growth. Debt leverage remained moderate at 4x EBITDA, underpinning a stable investment-grade credit rating. With the unit price range-bound since April, the yield has moved up to 6.8%. Growth pick BPL is upgraded to a Buy below $80.

Cedar Fair (NYSE: FUN) reported a 10% year-over-year gain in adjusted EBITDA  for the first half of 2016, and said the significant weather-related slowdown seen at most of its amusement parks in late July is not indicative of the consumer spending trends for the remainder of the season. Through July, 2016 revenue was up 2% over 2015, with park attendance as well as per-visit spending up 1% apiece. Cedar Fair’s season ticket sales are up 15% over last year’s records and the parks are opening earlier in the year and staying open later than ever. The company is also reaping the benefits of refurbishing the hotel next to its flagship Ohio park, upgrading its North Carolina attractions and rolling out seasonal food plans. The investment pace of recent years is likely to slow from here, leaving Cedar Fair with more free cash flow despite a rising tax bill. For now, those savings are likely to be allocated to further distribution growth and growth initiatives. But the park chain’s well-regarded CEO has acknowledged a big share buyback is possible eventually. The stock has been on a rollercoaster ride of its own of late, rallying 9% to a record high between the end of June and July 18, then giving back those gains. The current price provides an annualized yield of 5.7% on a distribution increased 10% in the last year and more than doubled since 2012. Another increase is likely after the next distribution is paid on Sept. 15. Growth pick FUN is upgraded to the #9 Best Buy below $65.

CONE Midstream Partners (NYSE: CNNX) reported strong-second quarter results and lifted its annual EBITDA forecast by 3%. Distributable cash flow rose 59% year-over-year as gathered volumes jumped 51%. The distribution coverage was 1.55x on a payout increased 15.5% in a year’s time. Units trading at a 52-week high have appreciated 34% in the four months since our recommendation, and now yield an annualized 5.5%. That’s still a great deal for a partnership with barely any debt and a huge growth opportunity if the sponsor begins drilling in earnest. There are early signs that 2017 could be that year, after the joint venture backing CNNX recently restarted a rig on its acreage. Growth pick CNNX is the #3 Best Buy below the increased limit of $24.

DCP Midstream Partners (NYSE: DPM) reported a 9% drop in second-quarter EBITDA, as a roll-off of commodity price hedges, lower liquids prices and diminished gas volumes in Texas more than offset cost savings and volume gains at Colorado gas processing plants. With all of its growth projects now completed, DPM ratcheted its capital spending down to the absolute minimum to post a distribution coverage of 1.06x for the quarter and 1.21 for the last 12 months, on a payout kept flat for nearly two years. The annualized yield is at 8.9% on units up 42% year-to-date but rangebound since early May. With a debt/EBITDA below 4 and no projects pending currently, the partnership has begun discussions with Colorado producers considering a pickup in drilling in response to higher oil prices. But the timing of any new projects remains uncertain and will require even higher oil prices in the $55-60/bbl range, according to management. In the meantime, DPM has mothballed two of its less busy Texas plants and sold a non-core Louisiana gathering system to cut costs and pay down debt. Aggressive pick DPM is a Buy below $36.

Delek Logistics Partners (NYSE: DKL) posted a 5% gain in second-quarter EBITDA, as improved wholesale fuel marketing profits offset diminished revenue from a crude pipeline. The distribution coverage improved sequentially to 1.31x on a payout growing nearly 15% annually and currently yielding 8.8%. Sponsor Delek Holdings (NYSE: DK) continues to consider the sale of some or all of its filling stations to DKL, and in the meantime the logistics MLP is poised to benefit from its investments in two new crude pipelines due to come online in the next few months. DK and DKL equity was bid last week on an unconfirmed report that Carl Icahn’s CVR Energy (NYSE: CVI) might be preparing to bid for Delek. DKL’s unit price has rallied 13% since Aug. 5 but remains down 20% year-to-date. Growth pick DKL is a Hold.

Energy Transfer Equity (NYSE: ETE) reported 1.15x coverage on a payout kept flat in the second quarter, and CEO Kelcy Warren flatly denied the possibility of a distribution cut. As detailed in a recent update, Energy Transfer also scored a coup when two major crude shippers abandoned a rival project to buy into its new Bakken-to-Gulf crude pipeline, which will get a big boost from their business. The midstream general partner’s units still yield an annualized 6.3% after advancing 8% in the last month and 32% year to date. Growth pick ETE is the #1 Best Buy below the increased limit of $22.

Energy Transfer Partners (NYSE: ETP) reported subpar distribution coverage of 0.91x once again, despite some help from an ETE incentive distribution subsidy that will save ETP $720 million through the end of 2017. The subsidy, along with cash from the sale of a partial stake in the Bakken pipeline, is expected to allow ETP to maintain its distributions while financing key growth projects. Units yield an annualized 10.2% after advancing 7% in the last month and 22% year-to-date. Growth pick ETP is a Hold.

EnLink Midstream (NYSE: ENLC) reported second-quarter distribution coverage of 1.07x on a payout kept level over the past year. Management talked up producer drilling plans within its gathering and processing footprint, in particular sponsor Devon Energy’s (NYSE: DVN) aggressive Oklahoma push and a new joint venture with a private equity firm aimed at expanding EnLink’s business in the Permian’s Delaware basin. Given the slim excess coverage at the EnLink Midstream Partners (NYSE: ENLK) operating affiliate and considerable capital spending needs, the resumption of distribution didn’t even come up in management’s discussion of the results or in questions from analysts. The unit price is up 5% over the last month but down 27% over the last year. The annualized yield is at 6.1%. Aggressive pick ENLC is a Hold.

Enterprise Products Partners (NYSE: EPD) posted flat earnings as rising natural gas liquids and marine terminal volumes offset diminished commodity margins and a slowdown in crude and natural gas transport. The distribution coverage of was 1.24x on a payout lifted the usual 5% year-over-year. The annualized yield is up to 6% after a 9% decline in the unit price over the last month. The dip late last week coincided with the news that Enterprise had unsuccessfully attempted to engage in merger talks with Williams (NYSE: WMB) following the collapse of that company’s merger with Energy Transfer Equity (NYSE: ETE). The odds of that deal happening still look long, while the likelihood of material cash flow gains once energy prices rise is high. Conservative pick EPD is the #11 Best Buy below $30.

Enviva Partners (NYSE: EVA) reported a 23% year-over-year jump in second-quarter adjusted EBITDA, continuing to sell at its maximum production capacity while taking advantage of cost efficiencies. That produced coverage of 1.50x on a distribution increased 3% from the prior quarter, a 12% annualized growth rate in line with management’s guidance. All of the current production capacity is currently locked up in European supply contracts with an average remaining term of eight-years, and there’s  upside from additional pending and possible supply pacts. Enviva’s sponsor is by far the largest supplier of wood pellets to European utilities, which are using them to meet stringent and mandatory targets for reducing carbon emissions. Over the next six months, the sponsor plans to sell to the partnership another North Carolina pellet plant along with nearby port facilities, assets that would boost EVA’s annual cash flow by roughly 30%. Exports to Asia represent a longer-term opportunity, as does the possible expansion of biomass burning plants in the U.S. as a cost-effective alternative to coal. EVA has returned 18% since our March 17 recommendation including distributions, and still yields an annualized 8.7%, with excellent growth prospects. Aggressive pick EVA is the #6 Best Buy below the increased limit of $29.

EQT (NYSE: EQT) expended a lot of energy to effectively run in place during the second quarter, increasing gas production volumes 26% but realizing prices that were 23% lower year-over-year. It did boost annual guidance for operating cash flow from $600-650 million to $750 million as a result of recent price gains, and said it would step up drilling to take advantage of the bullish medium-term fundamentals. The share price slid 14% between July 1 and Aug. 10, but remains up 37% year-to-date. Aggressive pick EQT is a Buy below $80.

EQT GP Holdings (NYSE: EQGP) increased the distribution tracking EQT’s general partner interest in its EQT Midstream (NYSE: EQM) MLP 12% sequentially and 63% year-over-year. Units now yield an annualized 2.4% and have been rangebound for the past six months. As a leveraged play on EQT’s rising output, Aggressive pick EQGP is upgraded to the #4 Best Buy below $30.   

EQT Midstream Partners (NYSE: EQM) reported a 25% year-over-year gain the second-quarter EBITDA, capitalizing in its sponsor’s production gains. That provided coverage of 1.49x on a distribution that continued to grow 22% annually. After a 3% gain in the last month units are up just 4% year-to-date, and yield an annualized 4%. The partnership is forecasting distribution growth of 20% in 2017. With net debt still lower than annual EBITDA vs. its long-term target of 3.5x debt/EBITDA, EQM plans to sell no more equity this year. Conservative pick EQM is a Buy below the increased limit of $90.

Fortress Investment Group (NYSE: FIG) saw fee-paying assets under management decline 2% year-over-year, even as it paid a second-quarter distribution of 9 cents a share, for a trailing yield of nearly 9% based on the last four quarterly payouts. We’re going to end up with a net loss of 2% after distributions for the past 11 months, because this is the end of the line for this disappointing recommendation notwithstanding its gain of nearly 20% since late June. Aggressive pick FIG is a Sell.

GasLog Partners (NYSE: GLOP) reported second-quarter results in line with expectations, and the additions to its fleet of LNG carriers over the last year. It subsequently executed a secondary equity offering, intended to help finance the next ship purchase from sponsor GasLog (NYSE: GLOP). The distribution, kept level for the past year, yields an annualized 9.5% based on a unit price that’s traded sideways since the end of May. But there is re-chartering risk starting in 2018, when the first three of GLOP’s eight current charters come up for renewal. GasLog was BG Group’s preferred shipper, but Shell (RDS-A), which closed its acquisition of BG Group this year, has a much more diversified array of industry relationships. Aggressive pick GLOP is a Sell.

Genesis Energy (NYSE: GEL) reported mixed second-quarter results, as rising offshore volumes from crude pipelines in the Gulf of Mexico offset weakness in most other business lines, including land pipelines, barge shipping, crude marketing and refinery services. The year-ago acquisition of full ownership on the offshore pipelines aided a 45% year-over-year gain in total segment margin. The distribution coverage was 1.18x on a payout increased 10% year-over-year, but after a decade of growth at that rate the distribution growth will slow significantly from here, the CEO said, a downshift apparently dictated by the recent business headwinds. The annualized yield is up to 7.5% after a 10% decline in the unit price over the last month in the wake of an equity offering that raised a bit over $300 million.                 We’re recommending halving your position so long as you can do so without unduly adverse tax consequences. Sell half of growth pick GEL.

Holly Energy Partners (NYSE: HEP) posted a 22% gain in second-quarter EBITDA as a result of recent acquisitions from its refiner sponsor HollyFrontier (NYSE: HFC). The distribution coverage of 1.17x supported a payout increased 7% year-over-year. The annualized yield is up to 7.3% after the unit price pulled back 10% over the last month. The price is still up 4% year-to-date and 43% from February’s low.   Growth pick HEP is a Hold.

Kinder Morgan (NYSE: KMI) has made no news since last month’s unsurprising earnings report and subsequent announcement of a pipeline asset sale and joint venture. But after dropping 11% during the last third of July the stock has come back strong, setting a new nine-month high last week. While the company’s exposure to rising demand for natural gas is a big plus, it will need to spend several more years working off excessive debt by stinting on dividends. The current yield on a payout slashed by 75% late last year is 2.2%. Growth pick KMI is a Hold.

Macquarie Infrastructure (NYSE: MIC) has returned 16% in the three months since we recommended this owner of fuel depots, airport fueling operations and power assets. Second-quarter cash flow increased nearly 9% year-over-year, as lower fuel prices boosted airport operations margins and as Macquarie continued to ramp up its power generation. Free cash flow provided coverage of 1.26x on a payout increased 13% year-over-year and currently yielding 6.2%. Growth pick MIC is a Buy below the increased limit of $88.

Magellan Midstream Partners (NYSE: MMP) posted flat distributable cash flow in the second quarter, as diminished Texas crude shipping volumes offset strong gasoline demand. That put the coverage at 1.19x on a payout increased 11% year-over-year. Debt was at 3.1x EBITDA but will be rising toward management’s target of 4x in the coming months as Magellan invests in the pipeline and crude splitter projects nearing completion and begins work on a new marine terminal. The current annualized yield is up to 4.7% following a 10% drop in the unit price over the last two months. That’s been driven primarily by management’s concerns that the crude shipping business could stay weak for several years, even as Magellan offsets a lot of the impact with growth elsewhere. The partnership remains committed to growing its distributions by 10% this year and at least 8% in 2017. Conservative pick MMP is the #10 Best Buy below $80.

New Residential Investment (NYSE: NRZ) recently paid out its fourth straight quarterly dividend of 46 cents a share, which works out to a 13% yield even after the stock rallied 42% from its February low. But after taking the roundtrip to the lows and back on this investor in complex mortgage securities over the last 11 months, the annual yield is pretty much the reward we have to show for a whole lot of volatility. This remains a risky business actually made riskier by low interest rates and one subject to significant regulatory and liquidity risks. Another share offering following the second-quarter results serves as a reminder that management effectively works for sponsor Fortress Investment Group (NYSE: FIG), the primary beneficiary of growth at NRZ and one whose interests don’t always coincide with those of NRZ’s retail shareholder base. Consider what a 13% yield represents in the current yield-hungry environment. Absent a panic, it signals excessive risk. Aggressive pick NRZ is a Sell.

NuStar Energy (NYSE: NS) posted flat earnings year-over-year, as strong refined fuel pipeline volumes and higher storage fees offset crude shipping declines in South Texas. The distribution coverage was 1.09x on a flat payout, and though coverage could dip below 1 for the current quarter, distributions are expected to be fully covered on an annual basis. The current annualized yield is down to 8.9% after a 23% rally year-to-date; and shares remained bid during the recent pullback in crude prices. Growth pick NS is a Hold.

NuStar GP Holdings (NYSE: NSH) kept its distribution level alongside that of its operating affiliate, and now yields 8.6%. The share price is up 12% since July 28, and the December $30 option calls have garnered recent interest. Aggressive pick NSH is a Hold.

UGI (NYSE: UGI) reported very strong third-quarter results propelled by its European propane distribution business, which benefited from an acquisition in France that yielded economies of scale and other savings. UGI’s Pennsylvania gas utility settled its request for a first rate increase in 21 years slightly below the midpoint, which will generate an additional $27 million annually,  or 14% of that division’s operating income for the past year. Management now plans to file rate increase requests on a regular basis. UGI is reinvesting some of its propane distribution profits in U.S. and Europe in new midstream infrastructure on its Pennsylvania home turf to capitalize on the growing natural gas shipments in the region. The stock has rallied 31% year-to-date but has pulled back 4% from the vicinity of record highs over the past week as rising interest rates took a toll on the utility sector. The current annualized yield is at 2.1%. Conservative pick UGI is a Hold.

Williams (NYSE: WMB) shares are up 23% since Aug. 1 and 148% since Feb. 8. They were propelled to a nine-month high last week by press reports that the company had rejected a merger approach from Enterprise Products Partners (NYSE: EPD) after Energy Transfer Equity (NYSE: ETE) withdrew its buyout offer. Enterprise reportedly remains interested in a deal, but with Williams management apparently unwilling to play ball and the stock up so much so quickly, the odds looked stacked against a friendly merger discussion. Nothing in Enterprise’s history suggests it would consider a hostile bid; rather the leaks suggest an effort to stir up Williams shareholders into pressuring management to the negotiating table. Don’t hold your breath. Rather, seize this golden opportunity to reduce exposure in the wake of the recent dividend cut, constructive though it may prove in the long run. Sell half of Aggressive pick WMB.