Here Are Two Ways To Play MLPs In A Challenging Environment

In the wake of Wednesday's oil sell off, analysts at UBS and Jefferies reexamined MLPs. As Jefferies argued, the market is concerned that these firms will be able to cover their dividend at a time when crude and natural gas prices are depressed. That has many MLPs down at least 30 percent – many down more – this year.

UBS' Perspective

UBS' note, written by Shneur Gershuni, took a broader view of the MLP market with the firm upgrading one MLP and downgrading another. Broadly, Gershuni examined the entire base of MLPs in the context of what would work if commodities remained "lower for longer." Sustained weakness in commodities will "weigh on upstream MLPs," particularly as "leverage across the group has increased YTD." Gershuni concluded that there needs to be a leveling out of the supply/demand balance in order for MLPs to "recover."

That did not stop the firm from upgrading Mid-Con Energy Partners LP MCEP to a Buy from Neutral. The stock, which has declined 59 percent year to date, has a bear case price target at $2.50 and a current dividend of 19 percent, though the market expects that to be lowered. In a bull case, Gershuni expects the stock to appreciate to $3.75, leading it to see nearly 40 percent upside.

Related Link: Why Crude Oil Could Still Fall To $30/Barrel

Jefferies' Take

Christopher Sighinolfi at Jefferies suggested another way that traders could play MLPs. The firm downgraded Targa Resources Corp TRGP to Underperform from Neutral and noted that the spread between it and Targa Resources Partners LP NGLS has recently widened to 590 basis points from an average of 325 basis points.

Sighinolfi said that traders could expect this spread to narrow as the market is expressing a "disproportionate" amount of concern in Targa Resources Partners. With "identical underlying fundamentals" and Targa Resources Corp reporting Q3 earnings in November, Sighinolfi suggested a relatively short timeframe for traders to see a 265 basis points return on the pair.