Our number one rule of picking takeover targets is to never buy a company we wouldn’t want to own if there was never a deal. These midstream energy stocks definitely qualify on that score, asserts Elliott Gue, editor of Energy & Income Advisor.

Among the larger and more diversified midstream companies, Magellan Midstream Partners (MMP) continues to stand out as a prime takeover candidate.

The company’s well-located refined products and crude oil transportation and storage assets serve a list of blue chip customers. And the sale of its 26 independent terminals network with 6 million barrels of storage for $435 million announced earlier this month will further focus operations on cornerstone assets.

Chief of these is the nation’s longest refined petroleum products system, which connects nearly 50 percent of US refining capacity with 100 million barrels plus of storage.

Cash flows from that system proved resilient last year, despite volume disruption due mostly to the pandemic. Now they’re getting a strong jolt from recovering throughputs as Americans take to the roads and the skies again this summer.

Q2 earnings released in late July should show more of that positive momentum. Meanwhile, the cash from the terminals sale will further shore up the already strong balance sheet, which at BBB+/stable outlook (S&P) is tied for the highest rating of any major midstream company or MLP.

Magellan would merge easiest with another MLP as that would avoid tax consequences. But buying in its general partner and eliminating incentive distribution rights several years ago should also decomplicate any transaction, and confer more benefit to ordinary shareholders.

Our highest recommended entry point has long been $75. That’s still well above Magellan’s current price, despite sizeable gains since November. And as such, it demonstrates how much higher the unit price could go in the next couple years, in addition to paying the well covered dividend of better than 8 percent.

Crestwood Equity Partners (CEQP), at less than $2 billion in market capitalization, would be a considerably smaller mouthful than Magellan at $11.3 billion.

Crestwood also announced a streamlining move in recent weeks, with the sale of its stake in the Stagecoach system to Kinder Morgan. Devoting sales proceeds largely to debt reduction is likely to earn the MLP a credit rating upgrade, with Moody’s putting the company on positive creditwatch.

But the real attraction of the company is its leverage to the energy price cycle, with well-positioned gathering systems in the Bakken, Powder River Basin and Delaware Basin of the Permian.

In addition, Crestwood has made its own simplification move, acquiring the general partner and limited partner interest of First Reserve and transitioning to an independent MLP with an elected Board of Directors.

That makes the path to a takeover considerably easier, even as the company makes itself a more attractive target by devoting free cash flow after dividends to paying off debt and buying back shares.

There’s also an 8 percent dividend yield to reward our patience. Crestwood is a buy up to our raised highest recommended entry point of $35.

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