Master limited partnership companies are facing multiple "existential issues," so investors should look for exposure to companies with simple structures, according to Seaport Global Securities.
Seaport Global's Bernie Colson and Ryan Amberger.
MLP companies face multiple existential threats, including the following, the analysts said:
- The FERC's decision to no longer allow MLPs to recover an income tax allowance in the cost of service,
- Investors are becoming "increasingly intolerant" of companies who pay close to 100 percent of cash flow and use the public markets to finance projects.
- A dropdown growth strategy continues to result in low returns and high financing costs.
- Only the biggest and strongest companies have favorable access to equity markets.
- IDRs will continue to "disappear over time."
Given the headwinds facing the sector, investors should look for the following qualities in MLPs, Colson and Amberger said:
- No IDRs.
- Ideally, a c-corp structure.
- High-quality assets.
- Manageable financial leverage.
- Ample distribution coverage.
- Minimal external equity needs.
Companies that fit this profile are more likely to execute on their strategies without relying on non-dedicated investors, according to Seaport. Companies who do not fit this profile, will be "at the mercy of the market," the analysts said.
- Seaport upgraded EQT GP Holdings LP (NYSE: EQGP) from Neutral to Buy with a price target lowered from $27 to $26.
- EQT Midstream Partners LP (NYSE: EQM) was upgraded from Neutral to Buy with a price target lowered from $70 to $67.
- Of the two names, the analysts prefer EQT GP, as it will disproportionately benefit from the 2018 Rice Midstream acquisition and 2019 start-up of Mountain Valley Pipeline, according to Seaport.
Related Link: Height Capital Markets: MLP Sell-Off Was An Overreaction
- Plains All American Pipeline, L.P. (NYSE: PAA): unchanged Buy rating and $25 price target.
- Plains GP Holdings LP (NYSE: PAGP): unchanged Buy rating and $25 price target.
- Enterprise Products Partners L.P. (NYSE: EPD): unchanged Buy rating and $27 price target.
Other Buy-Rated Names
- Andeavor Logistics LP (NYSE: ANDX): price target lowered from $60 to $48.
- Noble Midstream Partners LP (NYSE: NBLX): unchanged Buy rating and $52 price target.
- Western Gas Partners, LP (NYSE: WES) was downgraded from Buy to Neutral with a price target lowered from $59 to $41.
- Western Gas Equity Partners LP (NYSE: WGP) was downgraded from Buy to Neutral with a price target lowered from $49 to $32.
- Western Gas needs to restructure its business and ax "burdensome" IDRs to remain competitive, the analysts said — and shareholders may need to accept a distribution reduction as part of a consolidation.
Morgan Stanley Updates MLP Sector After FERC Decision
See more from Benzinga
- Facebook CEO Mark Zuckerberg On Data Privacy: 'My Mistake'
- What You Need To Know From Rent-A-Center's Guidance
- NewLink Genetics' Potential Catalysts Not Enough To Justify A Bullish Stance, Baird Says In Downgrade
© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.