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Analyst Says Energy MLPs Best Buy Since 2008

Compared to other income type equities, like utilities and real estate investment trusts (REITs), the master limited partnerships (MLPs) have been absolutely demolished. In fact, the Alerian index that tracks MLPs has underperformed the utilities and REITs by an incredible 17% and 19%, respectively, this year, and it also trails the overall energy sector by 5.5%.

A new report from Deutsche Bank says that this perfect storm of bad news has driven the MLPs down to levels that are now the most compelling since the huge sell-offs of 2008. While the firm is still cautious, and not ready to go for a rating of Overweight, it does have three best new money ideas for investors to consider now.

Energy Transfer Partners

This stock has been mauled and is offering investors a top quality distribution. Energy Transfer Partners L.P. (NYSE: ETP) currently owns and operates approximately 35,000 miles of natural gas and natural gas liquids pipelines. It also owns 100% of Panhandle Eastern Pipe Line Company (the successor of Southern Union Company) and a 70% interest in Lone Star NGL, a joint venture that owns and operates natural gas liquids storage, fractionation and transportation assets.

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Sunoco, an affiliate of the company, recently purchased eight Pico convenience stores in South Central Texas. Sunoco is the MLP that mainly supplies motor fuel to independent dealers, stores, distributors and commercial customers. Apart from its distribution business, the partnership also involves in the operation of retail fuel units and 150 convenience stores.

Energy Transfer Partners sits almost 35% off its peak, and while it is trading at a substantial yield, with high single-digit distribution growth the next few years makes this company very undervalued.

Energy Transfer shareholders are paid an outstanding 9% distribution. The Deutsche Bank price target for the stock is $67. The Thomson/Reuters consensus target is lower at $70.50. Shares closed Monday at $46.02.

MarkWest Energy Partners

This is a solid MLP to buy and recently has seen buyout chatter around Wall Street. MarkWest Energy Partners L.P. (NYSE: MWE) owns and operates midstream services related businesses. It has a leading presence in many natural gas resource plays, including the Marcellus, Utica, Huron/Berea, Haynesville, Woodford and Granite Wash formations, where it provides midstream services to its producer customers.

The company reported lower-than-expected first-quarter 2015 results due to lower natural gas liquid (NGL) sales volumes in the Gulf Coast and fractionated volumes in the Northeast region. The negatives are partially offset by increased natural gas gathering and processing volumes in the Marcellus area.

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The Deutsche Bank team acknowledges commodity pricing and equity issuance could pressure the company near term, but they also point out that the company has outstanding interconnectivity to takeaway capacity, very solid regional expertise and strong producer relationships. They, like others, think the stock is a buyout candidate as well.

MarkWest unitholders are paid a 6.68% distribution. The Deutsche Bank price objective is $76, and the consensus target is $74.71. Shares closed Monday at $55.06.

MPLX

This company reported very solid second-quarter numbers and may be more off the radar for some investors. MPLX L.P. (NASDAQ: MPLX) is a growth-oriented MLP formed in 2012 by Marathon Petroleum to own, operate, develop and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products and other hydrocarbon-based products. MPLX’s assets consist of a 99.5% equity interest in a network of common carrier crude oil and products pipeline assets located in the Midwest and Gulf Coast regions of the United States and a 100% interest in a butane storage cavern located in West Virginia, with approximately 1 million barrels of natural gas liquids storage capacity.

MPLX owns and operates a network of pipeline systems that include approximately 1,004 miles of common carrier crude oil pipelines and approximately 1,902 miles of common carrier product pipelines in nine states. In late July, the company declared a distribution of $0.44 per common unit. This represents an increase of $0.03 per unit, or 7.3%, over the first-quarter 2015 distribution and an increase of $0.0975 per unit, or 28.5%, over the second-quarter 2014 distribution.

MPLX unitholders are paid a 3.64% distribution. While the Deutsche Bank price target is $67, the consensus target is higher at $68.75. Shares closed most recently at $48.31.

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While the devastation in the sector will not be healed quickly, shopping around for quality companies like these makes good sense now. The distributions looked solid for the time being, and when the market does trade higher, they should tend to rebound faster.

By Lee Jackson


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