With oil prices improving over the past year, the energy sector has been a hotbed of merger and acquisition activity. These transactions and those to come will likely have a big impact on the high-yield payouts of midstream companies in the sector. Because of that, the following five high-yield stocks stand out as those to watch closely since they all have what could potentially be a payout-altering catalyst on the horizon.
It’s not a matter of if but when
On Energy Transfer Equity‘s (NYSE: ETE) first-quarter conference call, the company’s management team provided investors with a unique glimpse of what’s going on behind the scenes. One of the things they’re working on is the acquisition of namesake MLP Energy Transfer Partners. CEO Kelcy Warren said on the call that the companies have “looked at every scenario possible to us” and that the only one that makes mathematical sense is for Energy Transfer Equity to buy its MLP. That transaction would not only simplify the company’s corporate structure but could enable Energy Transfer to resume growing its 7.1% yielding distribution.
Waiting for the dust to settle
Earlier this year, natural gas giant EQT Corp. announced a series of moves to streamline its midstream business, including selling the rest of its midstream assets to its MLP, EQT Midstream Partners (NYSE: EQM), and merging its other MLP, Rice Midstream Partners, into EQT Midstream. The scale and complexity of these transactions have weighed on EQT Midstream, which has shed nearly 25% of its value since the start of the year. However, once the dust settles on these transactions, EQT Midstream could have significant upside since the company believes it can grow its 7.7%-yielding payout at a 15% to 20% annual rate through 2020.
Looking for more clarity
This past February, Antero Midstream Partners (NYSE: AM) announced the formation of a special committee of its board of directors to evaluate transactions that the company might take to improve its valuation. Among the options it could potentially consider is merging with its parent, Antero Midstream GP; a full spinoff from its producing partner Antero Resources; or even merging with another midstream company. The uncertainty about what the company plans to do is currently clouding its outlook, making it unclear if it will continue on the current path to increase its 5.1%-yielding distribution at a torrid pace over the next few years.
Waiting for the first one to drop
Last fall, big oil giant BP completed the IPO of its MLP, BP Midstream Partners (NYSE: BPMP). BP seeded the company with several pipelines, which positioned it to increase its 5.1%-yielding payout at a 5% to 6% annual pace through 2020. However, BP Midstream has the potential to grow at a much faster rate by acquiring additional midstream assets from its parent. The two companies hope to complete their first dropdown transaction later this year, which could accelerate BP Midstream’s distribution growth rate up to a mid-teens annual pace over the next few years. That upcoming catalyst makes BP Midstream worth watching since the size of the acquisition should give investors a better idea of how much the company could grow its distribution in the coming years.
An interesting catalyst to monitor
MPLX (NYSE: MPLX) currently expects to increase its 7.1%-yielding distribution by 10% this year. Furthermore, the MLP has $2.2 billion of expansion projects underway, which should fuel it to keep growing the payout in the future. However, an interesting catalyst developed earlier in the year when MPLX’s parent company, refining giant Marathon Petroleum, agreed to buy fellow refiner Andeavor. What makes that deal interesting to MPLX is that Andeavor owns several midstream assets as well as a stake in MLP Andeavor Logistics. It seems highly likely that Marathon will eventually sell those midstream assets to MPLX as well as merge the two MLPs. Those transactions have the potential to move the needle for MPLX, which is what makes it a compelling company to watch.
High yields with a dose of uncertainty
All five of these MLPs pay very lucrative distributions, which would make them attractive options for income seekers. However, each one also has a potential catalyst on the horizon that could make those income streams more or less attractive. That’s why investors should put these high yielders on their watch lists to see if those catalysts come to fruition.
10 stocks we like better than Energy Transfer Equity
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Energy Transfer Equity wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 4, 2018