The impact of a rising interest rate environment on the performance of energy master limited partnerships (MLPs) has become a growing topic of interest among investors, given the 137 basis point (bps) or 1.37% rise to 2.90% in the U.S. 10-year Treasury bond since the low reached on May 2. The analyst team at Credit Suisse point out in a follow-up research piece out today that MLPs outperformed the S&P 500 during mid-2004 and mid-2007, the previous periods of rising rates since 1994.
The natural question to ask is where to position an MLP portfolio in a continuing rising interest rate environment? The Credit Suisse current bias is to be overweight in larger cap, lower risk, diversified MLPs now and for the longer term. They point out that significant macro risks lurking in the background. The next debt ceiling, emerging market currency issues and Syria, to name a few. With those issues in mind, here are the top MLP stocks to buy that can perform well even with rising interest rates.
Access Midstream Partners L.P. (ACMP) has one very big fan of the stock at the top. CEO J. Michael Stice has purchased over $600,000 of the stock in the past year. Insider buying is always a good sign, especially when the stock has not shown significant weakness. The Credit Suisse price target for the stock is $55. The Thomson/First Call estimate is at $53. Investors are paid a 4.3% distribution. We like to remind readers that MLP distributions may include return of principal.
Cheniere Energy Inc. (LNG) is a top name to buy for investors looking to participate in the export of liquid natural gas (LNG). Asian demand for LNG is expected to grow solidly next year. In fact, Barclays predicts LNG demand growth will outstrip supply additions next year with global regasification capacity -- a measure of demand -- predicted to grow by 2.8 billion cubic feet per day. The Credit Suisse target for this top name is $38, and the consensus target is $38 as well. Cheniere does not currently pay a distribution.
EV Energy Partners L.P. (EVEP) is a solid name for investors looking for growth and yield. The company announced last Friday a $67.6 million purchase of natural gas properties in the Barnett shale. The acquisition is comprised of 82 wells producing primarily from the Barnett Shale formation in Tarrant County, Texas. The assets include more than 17,000 gross acres (9,500 net acres) that are 100% held by production. Credit Suisse has a $53 price objective for the stock, and the consensus target is at $50. Investors are paid a big 8.5% distribution. The Credit Suisse target is the highest on Wall Street and would represent a 45% move from current trading levels.
Kinder Morgan Inc. (KMI) is an anchor stock to buy for many MLP portfolios. Over the past five years, the pipeline giant has increased distributions by an average of 7%. That is a solid way to keep up with rising interest rates. The Credit Suisse price target for the stock is $47, and the consensus is placed at $42. Investors are paid a 4.5% distribution.
MarkWest Energy Partners L.P. (MWE) is a top Credit Suisse stock and was also started at Buy last week at Jefferies. The company has been a major benefactor of increased propane exports, which are up big this year and are expected to continue as international demand increases. The Credit Suisse price target for the stock is at $85, while the consensus objective is at $78.50. Investors are paid a 4.5% distribution.
Plains All American Pipeline L.P. (PAA) is one of the stocks to buy that we find on almost every Wall Street firm's coverage list. The stock has sold off recently, which might give investors a much better entry point. Plains is a top name in the transportation, storage, terminalling and marketing of crude oil and refined products in the United States and Canada. The company operates in three segments: Transportation, Facilities, and Supply and Logistics. Credit Suisse has a $64 price target, and the consensus is at $61.50. Shareholders are paid a 4.7% dividend equivalent.
QR Energy L.P. (QRE) historically has been one of the more stable upstream MLPs. On August 6, QR Energy announced that it had closed on its previously announced acquisition of mostly oil properties in the Arkansas, Louisiana and Texas area from a private seller for $109.2 million. The purchase boosted reserves by almost 6 million barrels of oil equivalent. The Credit Suisse target for the stock is at $20, the same as the consensus target. Investors are paid a giant 11.5% distribution.
Williams Companies Inc. (WMB) recently increased its distribution and also said that 20% annual dividend growth between now and 2015 should be expected. The company's Williams Partners segment owns and operates natural gas pipeline system extending from Texas, Louisiana, Mississippi and the offshore Gulf of Mexico through Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Delaware, Pennsylvania and New Jersey to the New York City metropolitan area. Credit Suisse has a $49 price target, and the consensus target is at only $40. Investors receive a 4.2% distribution. Credit Suisse target is the highest on Wall Street and would represent a 35% gain from current trading levels.
The bottom line for investors today is that the large caps have provided ample downside protection during periods of financial distress, and as such the Credit Suisse team continues to believe investors should have solid positions in some of the higher quality names. Rates going higher is a given, so it is also comforting for investors to know that the top MLP names have performed well in the past when rates have risen.