MLPs - Comments from Wells Fargo Equity Research

[dan_s]

Outlook – Compelling Valuations, But No Near-Term Catalyst.
Given the precipitous decline in unit/share prices, the sector now looks attractive on most valuation metrics. MLPs now yield 9.4% (median) and trade at price-to-DCF and EV/EBITDA multiples of 8.9x and 12.1x, respectively. This compares to the five year averages of 6.8%, 12.5x and 12.3x, respectively. Notwithstanding these attractive valuations, we do not see any near-term positive catalyst to reverse the recent trend other than an end to tax loss selling at year end and a change in crude fundamentals / sentiment.

Our Long-Term View Is Constructive.
Notwithstanding our near-term outlook, we continue to view most midstream MLP distributions as secure even in this environment. We believe sentiment will improve once crude oil prices
stabilize at a level that is economic for U.S. producers to drill and grow profitably. This should lead to a clearer trajectory for volumes. We forecast 2016-2018 organic capital spending of $76.4B and a three year distribution CAGR for the sector of 5.6%. Consequently, we do view the current weakness as a good entry point for long-term oriented investors. We would be positioned in high quality, large cap fee-based names (reflected in our top picks below). We’d also expect fee based, defensive names, with manageable capital needs to continue to hold up better in the near term. Names in that category include: BPL, DM, MMP, and SEP.

Top Picks. Our top picks are EPD ($24.08), ETE ($17.30), MMP ($61.00), and SXL ($26.99).

[cviller]

Dan,
Are those your top picks or Wells Fargo's? Thanks.

[dan_s]

Those are Wells Fargo's top picks.