Portfolio Update

• USA Compression Partners (NYSE: USAC) added to Aggressive Portfolio. Buy below $22 (See New Buys.)
• Shell Midstream Partners (NYSE: SHLX) upgraded to a Buy below $33 in Growth Portfolio
• Sunoco Logistics Partners (NYSE: SXL) upgraded to a Buy below $33 in Growth Portfolio

Oaktree Capital Management (NYSE: OAK) posted a 15% increase in second-quarter distributable earnings. That produced 1.24x coverage on a distribution of 58 cents per unit. Oaktree has distributed $2 per unit over the past year, for a 4.6% trailing yield. The leading debt investor and big alternative asset manager continues to exercise patience in the face of buoyant markets, sitting on $23 billion in uncalled capital commitments, against $98 billion in assets under management. That patience is likely to keep fee earnings relatively flat over the next year, management noted. The unit price is down 1% over the last month and in the lower half of its extended trading range. Aggressive pick OAK is a Hold.

PBF Logistics (NYSE: PBFX) reported flat distributable cash flow in the first half of 2016 from a year earlier and tempered distribution growth for the second quarter in a row to approximately 10% annualized, less than half the prior rate . The rising interest expense and unit count left second-quarter distribution coverage at 1.17x, down from 1.70x a year earlier. The partnership subsequently acquired a 50% stake in a crude pipeline used to supply its sponsor’s recently acquired Torrance, Calif., refinery, issuing more units to cover roughly half of the $175 million price tag. The unit price has changed little in the last month, leaving the annualized yield at 8.5%. Growth pick PBFX is a Hold.

Plains All American Pipeline (NYSE: PAA) reported a 7% year-over-year decline in distributable cash flow for its second quarter and reiterated annual guidance  for more of the same ahead of an industry recovery now expected a year from now. That forecast implies coverage of 1.05x on the reduced distribution unveiled in the July restructuring, and that doesn’t include in-kind distributions to holders of its preferred units, so Plains is still not quite making what it pays.  So it’s contemplating more asset sales and perhaps taking on a strategic outside investor while it waits for new projects to come online and for oil shipping to recover. The unit price is down 9% in the last month amid a pullback in the price of oil, most of the way back down to where it was before the distribution cut in mid-July. November’s reduced payout of 55 cents per unit works out to an annualized yield of 8% at the current price. Growth pick PAA is a Buy below $31.50.

Plains GP Holdings (NYSE: PAGP) is set to become a dividend-paying tracking stock for PAA following the expected closing at the end of November of the deal restructuring its general partner interests. It has gained 15% since the announcement versus less than 3% for PAA, mostly by holding steady over the past month while PAA deflated. Its own reduced distribution works out to an annualized yield of 7.4% at the current share price. PAGP will report its returns of capital (as opposed to dividends for at least the next eight years) on form 1099, which will make it popular with mutual and closed-end funds as well as individual investors seeking income for tax-deferred IRA accounts. Growth pick PAGP is a Buy below $12.   

SemGroup (NYSE: SEMG) reported predictably weak second-quarter results weighed down by competition from rival crude shippers and a gas processing plant outage. Its planned acquisition of the affiliated Rose Rock Midstream (NYSE: RRMS) MLP is set to close on Sept. 30, producing tax and distribution savings for the parent company. Following the all-stock deal, SemGroup plans annual growth of 8% for a dividend currently yielding an annualized 5.4%, while maintaining 1.5x dividend coverage. Those plans will be aided by  the completion early next year of a pipeline system serving two Motiva refineries in Louisiana, even as SemGroup pursues the sale of its Mexican asphalt terminals. The share price is up 3% in the last month and 15% in 2016, but still down 35% over the last year. Aggressive pick SEMG is a Hold.

Shell Midstream Partners (NYSE: SHLX) emerged from last year’s MLP crash with nary a scratch but has been among the sector’s worst performers this year alongside other low-yield, high-growth midstream partnerships, declining 29% so far in 2016. Investors have preferred fixer-uppers offering much higher yields along with hope for a quick recovery. Two sizeable equity offerings this spring didn’t help demand, though they did allow the partnership to ramp up acquisitions from sponsor Shell (NYSE: RDS-A) without running up much debt. Those deals, in turn, have supported annual distribution growth of more than 25%, with steady coverage of 1.4x despite the higher unit count. At that pace, and assuming a steady unit price, the current yield of 3.4% would grow to 5.2% within two years. Debt barely exceeds the annualized EBITDA, and costs less than equity, leaving plenty of room to increase leverage should the partnership’s conservative management wish to do so.  Some of Shell’s offshore pipelines in the Gulf of Mexico are next on the dropdown menu, likely to be followed eventually by the ethane pipelines that will feed the recently announced petrochemical plant in western Pennsylvania. Growth pick Shell is upgraded to a Buy below $33.  

Spectra Energy (NYSE: SE) surprised and pleased the market by agreeing to an all-stock $28 billion merger with Canadian crude pipeline giant Enbridge (NYSE: ENB) instead of pursuing an acquisition of its own. As we noted in a recent update, the deal will diversify Spectra’s commodity and geographical exposure while improving dividend coverage, one reason management agreed to exchange its pricey equity for Enbridge’s recently discounted shares at a relatively modest markup. Spectra’s stock was up 51% year-to-date before the deal announcement, and has rallied a further 17% since. At the planned exchange ratio of 0.984 Enbridge shares per Spectra share, each Spectra share should generate $1.82 (U.S.) next year. That prospective 4.3% yield assumes a steady exchange rate for the Canadian dollar and the 15% dividend hike Enbridge plans next year if the deal is concluded. The payout ratio would be 50-60%, well below Spectra’s planned 83% this year. Growth pick SE remains a Hold.

Spectra Energy Partners (NYSE: SEP) saw a very different market reaction to the Enbridge offer than its sponsor, depreciating 6% since the announcement. Investors are nervous about Enbridge’s commitment to continued growth given its own MLP, along with a tracking stock and a separate Canadian income vehicle. Those concerns seem likely to abate in time, and Enbridge has said it has no immediate plans to consolidate the MLPs. In the meantime, the yield is up to 6.2%; it’s growing 7% annually with ample coverage. Conservative pick SEP was upgraded to a Buy below 50 on the day the merger was announced.

Suburban Propane Partners (NYSE: SPH) held retail margins steady during its seasonally slow third quarter, and has overcome last winter’s record warmth to cover – just — its distributions since last fall. These still provide an annualized yield of 10.8% despite the units’ 47% return in the seven months since we recommended them. Growth pick SPH is Hold.

Sunoco Logistics Partners (NYSE: SXL) has been discounted 9% since Sept. 8, the day before Dakota Access Pipeline lost its permit to build the controversial segment crossing the Missouri just upriver from a Sioux reservation. Although it’s only a minority investor in the pipeline, SXL would greatly benefit from the additional crude volumes the project would direct toward its terminals. The partnership has suffered from low oil prices and teething pains for its new liquids pipelines, but still earned enough in the first half of the year to full cover a distribution increased 14% over the last 12 months. At the current unit price, the annualized yield is up to 7.1%. Growth pick SXL is upgraded to a Buy below $33.

TerraForm Power (NASDAQ: TERP) has just launched its widely anticipated search for a buyer either of the entire company or the controlling stake held by bankrupt sponsor SunEdison, after releasing preliminary second-quarter results. These showed a negative number for cash available for distribution as a result of the additional collateral the company had to put up in the wake of SunEdison’s bankruptcy. Excluding that drain, cash available for distribution would have amounted to $55 million, which works out to 39 cents per share and an annualized yield of 11.6% at the current share price. Excluding a further $32 million in principal debt repayments would boost the indicative yield above 18%. Aggressive pick TERP is the #7 Best Buy below $15.

TransCanada (NYSE: TRP) shares are back at a price level they only exceeded briefly in 2013 and again right before the shale bubble burst the following year. In June, the Canadian pipeline giant completed its $14 billion acquisition of Columbia Pipeline Group, diversifying its footprint with a gas transmission line stretching from Louisiana to New York and a distribution system overlapping the Marcellus and Utica shales. Earnings excluding special items have been flat this year versus a year ago, but distributable cash flow excluding Columbia acquisition costs still provided 1.76x coverage for the current 3.7% dividend yield. The company has forecast annual dividend growth of 8-10% through 2020. Growth pick TRP is a Hold.