What’s there left to say about energy stocks? Like with other hard-hit industries, the novel coronavirus has been bad news for the oil and gas space. A rebound in energy prices remains in progress. But, there may be ample opportunity for contrarians.
How so? Tech stocks have recovered (and then some). Blue-chip consumer stocks have recovered as well. You missed out on either recovering if you didn’t buy in the months following March’s pandemic crash. Yet, with this space still in the dog house, there are plenty of rebound opportunities still out there.
So, does that mean go out and buy major oil stocks, like ExxonMobil (NYSE:XOM)? Possibly, but there may be greater opportunities in one area of the energy stock universe. I’m talking about MLPs, or master limited partnerships.
As the name implies, these are limited partnerships. But, instead of being available to just accredited investors, retail investors can buy and sell these as they would regular stocks. What’s the benefit? As a pass-through entity, profits are not taxed at the entity level. Instead, most of the earnings flow to investors (distributions).
The flip side? You must pay taxes on your share of the distributions. This is similar to the setup with REITs (real estate investment trusts). But, like that popular vehicle for income investors, investing in this sector could produce not just income, but the potential for substantial gains as well.
Sure, this sector faces a long path to recovery. It may not be for several years energy stocks retrace their pre-pandemic price levels. But, with high yields while you wait, and the opportunity for long-term upside, consider these five MLPs as we enter the fall:
- Enterprise Products Partners L.P. (NYSE:EPD)
- Magellan Midstream Partners, L.P. (NYSE:MMP)
- Phillips 66 Partners LP (NYSE:PSXP)
- Suburban Propane Partners L.P. (NYSE:SPH)
- Sunoco LP (NYSE:SUN)
Energy Stocks: Enterprise Products Partners L.P. (EPD)
One the largest MLPs out there, Enterprise Products owns both oil and natural gas pipelines.
But with prices of both commodities hammered by the pandemic and its affects on energy demand, it’s no surprise shares are down more than 45% since January.
Yet, with a 11.5% forward yield, it may pay to buy now, and sit tight until shares bounce back to pre-outbreak price levels. Sure, like with many midstream companies, the balance sheet contains a fair bit of leverage. But, as one commentator noted, this MLP is not overleveraged. Not only that, most of its outstanding debt is long-term, fixed-rate. With this in mind, investors should be confident the company can maintain its current high payout rate.
Put it all together, and there are many merits to buying EPD stock, while shares remain around $15 a piece. Don’t expect a quick rebound back above $25 per share. But, with a double-digit yield, your patience could pay off in the next few years.
Magellan Midstream Partners L.P. (MMP)
Like Enterprise Products, Magellan is another major MLP. InvestorPlace’s Tezcan Gecgil discussed this name back in July, noting that the company’s midstream capacity tops 100 million barrels of petroleum products.
But low energy prices have meant bad news for those holding MMP stock. Shares are down more than 46% so far this year. Yet, after the big decline due to the outbreak, those diving into shares today can get in at a great entry point.
How so? with a forward yield of 12.3%, this is another high-yield opportunity for income investors. Yes, you may be concerned this hard-hit midstream name can keep up with its current level of payout.
What are the odds of a distribution cut? Magellan will produce enough cash flow this year to keep the current distribution rate as-is. But, besides producing stable distributions for income investors, there’s something here for those looking for gains as well.
With catalysts like the closure of several refineries potentially benefiting the MLP, improvement could be on the horizon. And with this improvement, expect shares to start recovering from today’s rock-bottom prices.
Yes, MMP stock has been trending lower, after partially rebounding in the early summer. But, while the sector remains out of favor, keep this major midstream MLP on your radar.
Phillips 66 Partners LP (PSXP)
After cratering earlier this year, most MLPs have made a partial recovery. But not pipeline owner Phillips 66 Partners.
In fact, PSXP stock trades continues to trend lower. What’s causing this sell off? Chalk it up to its exposure to the Dakota Access pipeline (DAPL). DAPL controversy has led to calls for it to be shut down. A legal decision last month bought both the pipeline and its investors some time. Chances are the pipeline remains open through 2020.
But, the risk of an eventual complete shutdown continues to weigh heavily on the MLP’s shares.
So, why buy this name, which, worse case scenario, could suffer a crushing blow due to its DAPL exposure? Consider this a high-risk, high-return opportunity. Right now, with the Democrats favored to not just win back the White House, but take back the U.S. Senate as well, a handover of political power could accelerate a complete DAPL shutdown.
Yet, what if President Trump pulls off an upset? The calls for a DAPL shutdown could be further delayed. This could mean a massive boost for PSXP stock. Granted, this is a more speculative play than income-oriented MLP investors are used to. Don’t bet the ranch, but the risk/return proposition on this unique opportunity may make it worthwhile for some investors.
Suburban Propane Partners L.P. (SPH)
So far, we’ve talked about oil and gas pipeline/storage MLPs. But, Suburban is a different type of master limited partnership. This MLP, which is a mainly a retailer of propane in the Northeastern United States, is one of the few non-pipeline MLPs still out there.
And, despite halving its distribution, investors may find opportunity in SPH stock. Not only for income, but the potential for big gains as well. After tumbling more than 32% this year, there may be a clear pathway to rebound as we enter 2021.
How so? While commercial demand remains low, it’s making a comeback. And, with the stability of residential demand, the company may be able to improve results over the next quarters. As investors regain confidence for this hard-hit energy play, expect this MLP to start climbing towards prior price levels.
While not as high yielding (8.1%) as the aforementioned pipeline names, a recovery will ensure a “return to normal” for the prior distribution. This will also help drive investors back into the stock. While it differs from most major MLPs, consider this propane supplier one to keep an eye on.
Sunoco LP (SUN)
Like with Suburban, Sunoco is an MLP focused on the marketing end of the energy business. But this company has more on its side than the strong brand equity of its flagship gas station brand.
With shares yielding 13.6%, this is another double-digit play for income investors. And, while shares are down much less year-to-date (20.5%) compared to most MLPs, there could be room for appreciation for those eying potential gains rather than income.
What could put points back into SUN stock? How about an end to today’s “new normal” environment? A “return to normal” could happen by mid 2021, as prospective vaccines become widely available.
With a vaccine, offices can fully reopen. Travel can get back to normal as well. With a full rebound in mass commuting and leisure travel, a comeback in gasoline demand seems inevitable. This will help drive this petroleum products distributor and gas station operator higher.
Sure, there’s a risk shares today are pricing in too soon of a recovery. But, with the high yield providing returns while you wait, give this downstream energy play a look as well.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.