Baird Cautious On MLPs While Credit Suisse Turns Positive

In a report published Tuesday, Baird analyst Ethan Bellamy turned cautious on the Master Limited Partnership sector by downgrading a gas gatherer, a diversified crude logistics provider, and an NGL producer – all of which "suffered in unique ways" from falling oil prices and "deteriorating" capital costs. "We remain pessimistic about near-term prospects for the MLP group ad recommend caution until seasonal headwinds abate," Bellamy wrote. "For investors without patience, go up market cap, up liquidity and up balance sheet."

Bellamy downgraded shares of

to Underperform from Outperform with a price target lowered to $9 from a previous $16 after the company's second quarter EBITDA was 34 percent below his Street-low estimates. Bellamy added that the company's 2015 EBITDA to date is only running at 40 percent of its full year guidance, implying revised expectations may be forthcoming as soon as Tuesday's conference call. If the company makes no changes to its guidance, investors are "likely to sell in disbelief anyway."

Bellamy downgraded shares of

to Neutral from Outperform with a price target lowered to $15 from a previous $19 after the company reported a "ho hum" second quarter where management provided it is "too slow" to respond to deteriorating capital costs. However, Bellamy stated he still has a positive bias on Cone's long-term story but management needs to "pull the levers" to provide accretion in the near term.

Bellamy downgraded shares of

to Underperform from Outperform with a price target lowered to $1 from a previous $2 after the company's second quarter report offered "nothing to get excited about." Bellamy also added that New Source Energy is "an extreme high-beta option on oil prices." In addition, the stock's price trading below $1 per share suggests the company "effectively has no credibility, no access to capital, and gnarly financial handcuffs."

John Edwards of Credit Suisse offered an opposing take on the sector by upgrading the group to Overweight. According to Edwards, MLPs are tracking to achieve 7.8 percent year over year growth in 2015, which is higher than last year and at the high end of his prior five to eight percent forecast range. The analyst added that if the sector's growth rate is sustained over the next 12 months, investors face a total return outlook of 40 to 45 percent assuming reversion to mean yields in the 5.75 to 6.0 percent range and 30 percent total return should high yield scenarios over the next 12 months be realized. Edwards also pointed out that the sector has benefited from consolidations creating stronger companies with "plenty" of access to capital. As such, the analyst suggested that yields become as high as they were during the 2008-2009 financial crisis is "highly unlikely." Finally, Edwards recommended investments in "defensive names" with low commodity exposure "make the most sense." This would translate to Pipeline-oriented MLPs, especially on the natural gas side, such as

,

and

.