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Opportunities in the MLP Selloff

05/02/2018 5:00 am EST

Focus: MLPS

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

Broad-based selling has battered the Alerian MLP Index; the selloff picked up steam when the Federal Energy Regulatory Commission (FERC) unveiled a rule that would eliminate MLP's income tax allowance for interstate pipelines operating under cost-of-service contracts, explains Peter Staas, editor of Energy and Income Advisor.

Although this ruling primarily effects only a handful of MLPs, a lack of depth in this niche market and the likelihood of forced liquidations by heavily levered closed-end funds have brought the entire group down.

However, midstream stocks that don’t feature prominently in the Alerian MLP Index may offer more upside potential in the near term, especially with energy- and MLP-focused strategies potentially rotating into some of these names after paring their exposure to partnerships with the most exposure to FERC’s policy shift on cost-of-service contracts.

Investors looking to put fresh money to work in the MLP space should consider Crestwood Equity Partners LP (CEQP), which offers a compelling combination of a higher yield (9 percent), strong distribution coverage (1.35 times in the fourth quarter) and minimal need to issue equity. Management also indicated that a payout increase could be in the cards later this year.

Crestwood Equity Partners LP is up 5.59 percent on the year, but the stock has pulled back with the upheaval in the midstream space. Aggressive investors should take advantage of this recent weakness and buy Crestwood Equity Partners LP up to $30.

Noble Midstream Partners LP (NBLX) trades at an enterprise value that’s less than 8 times forward operating cash flow—a huge dislocation for a name with promising organic-growth prospects and a strong balance sheet.

The partnership covered its fourth-quarter payout by a whopping 2.16 times, boasts a strong balance sheet and has guided for 20 percent distribution growth through 2022, fueled by its exposure to accelerating drilling and completion activity in the Denver-Julesburg Basin and the Delaware Basin.

Management’s guidance calls for Noble Midstream Partners’ distributable cash flow to cover 90 percent of its payout and growth-related capital expenditures from 2019 to 2022. You’d be hard-pressed to find another MLP that can make that claim. Noble Midstream Partners LP looks like a steal at these levels.

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