Though oil prices have recovered from their historical lows prices still remain downside. Commodity’s woes seem to continue as prices linger around $50.
With the declining oil prices, investors remain skeptical to invest in exploration and production companies. As these companies are directly correlated to commodity prices, profit margins of such companies shrink with falling crude prices.
However, Master Limited Partnerships (MLPs) in the energy space are not directly dependent on commodity prices and continues to thrive amid the changing dynamics of the industry.
MLPs: A Safe Haven for Investors
MLPs differ from regular stocks in the sense that interests in them are referred to as units and the unit holders are partners in the business. Importantly, these hybrid entities bring together potential tax benefits with safe and sustainable dividend payouts. MLPs which are touted as a safe haven, offer considerable returns at significantly lower risk.
Midstream MLP is the most popular MLP which owns and operates pipelines and is involved in processing and transportation of energy commodities under long-term fee-based contracts. They provide the necessary infrastructure for the operation of the energy companies. Since their profits are not directly tied to the prices of oil and gas, they generate relatively consistent and predictable cash flows. This enables these MLPs to pay out fairly growing distributions.
In addition to high yields, MLPs are structured as pass-through entities. This means that they typically distribute nearly all of their cash flows to unit holders. The MLPs are not required to pay a corporate income tax as the tax liability of the entity is passed on to the owners (or unit holders) in the form of cash dividend (distribution). This allows the MLPs to offer very attractive yields to investors.
Further, MLPs have low correlations with other asset classes that include equities and commodities and thus add diversification benefits to portfolios.
MLPs operate in the upstream and downstream segments of the market, however, the former is widely exposed to the price swings of commodity markets but the latter is moderately affected by the demand swings of finished products. As such midstream MLPs are the most profitable investment instruments in the current volatile environment for income oriented investors.
Thus we have picked four best-ranked stocks from the Oil/Gas Production Pipeline MLP industry which is placed in the top 42% of the Zacks Ranked Industries.
How to Identify the Outperformers?
With a wide range of energy partnerships thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver attractive returns. Moreover, despite Trump’s ‘America-first energy’ plan and his efforts to remove environmental blocks to pipeline projects, all pipeline stocks have not rallied.
While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy. We highlight the following stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment in the prevailing operating background.
Moreover, these stocks are placed in an industry, which is ranked an impressive 109 out of the 256 industries in our coverage (top 43%).
4 Stocks That Warrant a Look
Transmontaigne Partners LP (TLP - Free Report) : Based in Denver, this fuel terminalling and transportation partnership sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.Transmontaigne Partnersoutperformed the broader industry in the last three months. During the aforesaid period, the units of the partnership were up by 6%, whereas the broader industry gained 3%. The partnership also delivered an average positive earnings surprise of 6.6% in the trailing four quarters. Further it has also seen favorable earnings estimate revisions in the last 30 days.
American Midstream Partners, LP : Headquartered in Texas, this Zacks Rank #2 partnership provides critical midstream infrastructure that links producers of natural gas, crude oil, NGLs, to end-use markets. The partnership has an impressive pricing strength and has outperformed the broader industry in the last three months. During the aforesaid period, units of American Midstream were up by 8.5%, whereas the broader industry gained 2.6%.The stock has a high distribution yield of 12.69%, outperforming the broader industry’s yield of 4.3%.
Cheniere Energy Partners LP Holdings, LLC (CQH - Free Report) : Houston, TX-based partnership operates the Sabine Pass natural gas regasification and liquefaction facilities and carries a Zacks Rank #2. Units of Cheniere Energy Partners LP Holdings have gained 9.5% in the last six months, significantly outperforming the industry to which it belongs. The partnership expects year-over-year growth of 1,408.36% and 1,062.5% in its revenues and earnings respectively in 2017.
Southcross Energy Partners, L.P. : Headquartered in Texas, this Zacks Rank #2 provides natural gas gathering, processing, and transportation services along with NGL fractionation and transportation services. The partnership also delivered an average positive earnings surprise of 9.79% in the trailing four quarters. Further, it expects year-over-year growth of 27.06% and 46.41% in its revenues and earnings respectively in 2017.
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