Plains All American Pipeline, L.P. (PAA) shows 15% total-return potential when looking at the company’s distribution growth, yield and potential stock appreciation, and PAA is also poised to benefit from its positions in the Permian basin and Bakken shale, says Daniel Katzenberg, Executive Director and Senior Analyst for Oppenheimer & Co. Inc.
“This is one of my favorite names. It has a lower yield, relatively speaking, at just about 4.2%, but the distribution growth is over 10% — so if you look at all in, you get 15% total-return potential, and it’s a very stable, well-run company. This is something that you can get excited about,” Katzenberg said.
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Plains All American has a very high leverage to the oil and liquids plays, and with their large footprint in the Permian basin and their recent rail acquisition up in the Bakken, PAA is positioned to benefit from growth in both areas, Katzenberg says.
“They have a big footprint in the Permian basin in West Texas, which has been attracting more and more capital over the last year or so, and they’re really poised to benefit from that growth. They also just recently announced a rail acquisition up in the Bakken, and I think as we go forward we’ll see Plains benefiting from the ability to bring Bakken crude toward the East Coast, which is a trend I expect to see going forward,” Katzenberg said.
PAA Natural Gas Storage, L.P. (PNG) appears to be overvalued by the market given current weak natural gas economics and limited potential for growth for this MLP, though the company is expected to continue its yield given the deeper pockets of its parent company, Plains All American Pipeline, L.P. (PAA), says Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.
“Would we pay a 6.7% yield for something that appears to have basically bond-like characteristics and limited outlook for growth, at least in the short term? That seems a little rich to us. Down the road, there’s a chance that if private equity operators who own gas storage assets and develop those assets with the intent to ultimately sell them to an MLP like PNG, if they change their outlook and recognize that there’s been a sea-change downward in intrinsic gas storage economics, potentially that would allow PNG to do some accretive acquisitions,” Bellamy said.
Bellamy says, however, that PNG does not seem to have capitulated yet and the MLP is not a name the analyst would short, although he says other names may offer more upside.
“I would say that the market appears, in our view, to have overbid PAA Natural Gas Storage,” Bellamy said. “The natural gas storage market has been extremely disappointing. Intrinsic gas storage economics are very poor and don’t appear to be recovering any time soon. We think that PNG has the benefit of a parent that will always step up and make sure they are able to pay their distribution, so this is definitely not a name that we would short.”
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Lehigh Gas Partners (LGP) has a first-mover advantage in the wholesale distribution of motors fuels, and this downstream oil and gas name has recently acquired accretive assets and is expected to announce increased yield, resulting in unit appreciation, says Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.
“Within the downstream market, we’re big fans of Lehigh Gas Partners, which is a very small, call it microcap downstream name that is a wholesale fuel distribution business. It’s trading just above last year’s IPO price. They’ve done a few significantly accretive acquisitions, and they have first-mover advantage,” Bellamy said.
Bellamy expects LGP‘s next distribution announcement to be higher, and he says LGP units would react favorably after a distrubition increase. He adds that they are first movers in an area where they can potentially use their cost of capital to expand their business rapidly and in an accretive fashion, especially as monetary policy currently seems to benefit master limited partnerships.
“We have extraordinarily accommodative monetary policy out of the Federal Reserve that benefits hard assets and commodities, and that’s what all MLPs do and are. I don’t see a big change in interest rates coming any time soon that would hinder the extraordinarily low cost of capital that’s allowing MLPs to borrow at very low rates and redeploy in highly accretive projects,” Bellamy said.
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Targa Resources Corp (TRGP), owner of the general partner to the MLP Targa Resources, LP (NGLS), is poised to offer dividend growth north of 20% and has growth prospects from an acquisition in the Bakken shale, says John Edwards, Director and Senior Equity Research Analyst at Credit Suisse Group.
“While we’re looking for high single-digits out of the underlying MLP, because of the amount of growth projects that will be on board for the MLP, some equity issuance combined with the distribution growth will translate to dividend growth at TRGP well north of 20%, so we think that’s another really nice play for the next few years,” Edwards said.
TRGP‘s Bakken shale growth comes from an acquisition made in the area, where the company acquired midstream infrastructure assets which will allow it to serve the burgeoning E&P industry in the region.
“The underlying LP recently made a step-out acquisition in the Bakken shale — buying some oil transportation, storage and terminals assets there, which also have terrific growth prospects there with over 260,000 acres of oil production dedicated to those assets,” Edwards said.
Genesis Energy, L.P. (GEL) has raised distributions 30 quarters in a row, including through the financial crisis, and is proving to be a solid midstream MLP play with its dividend payouts, well-placed assets and solid balance sheet, says John Edwards, Director and Senior Equity Research Analyst at Credit Suisse Group.
“Our thesis for the last year or so, maybe even longer, has been to overweight the oily-related infrastructure names…GEL is levered to the oil infrastructure thesis. Its assets are very well-placed because they’re along the Gulf Coast, and they have a very solid balance sheet — low leverage, very high distribution coverage and high visibility in terms of capital projects,” Edwards said.
Genesis Energy currently has the highest capital project visibility since Edwards started covering the stock four or five years ago, and GEL‘s consistently raised distributions indicate that the company will be a continuous solid play in the midstream area, Edwards says.
“They’ve raised the distribution something like 30 quarters in a row, including through the financial crisis; it’s been averaging over 10% annually, and the lowest increase it ever experienced was still over 8% year over year,” Edwards said.
Linn Energy LLC (NASDAQ:LINE) has received negative news media attention recently regarding allegedly fraudulent activity in short cases, but the negative headlines against the MLP may be explained as complications that some investors do not understand given the MLP’s fairly complicated structure, says Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.
“We are also big fans of Linn Energy and their pari-passu C-Corp vehicle, LinnCo (LNCO),” Bellamy said. “We think they’ve been excellent stewards of capital, and we think there are a number of near-term catalysts — potentially a shift to monthly distributions, potentially a C-Corp M&A deal executed by LinnCo and potentially another distribution increase — that could continue to squeeze the shorts.”
Bellamy says LinnCo currently looks attractive, as shorts were squeezed recently during intraday trading. He adds that the negative news regarding the master limited partnership are overdone, and does not believe the company has deceived anyone.
“They’ve been much in the news lately with a short case by an anonymous short seller that’s been circulating. That was picked up in Barron’s this past weekend in a negative article. We think the issues surrounding Linn are overdone. They’re fairly complicated, so they may be lost on the average individual investor, but the bottom line is we don’t think Linn has done anything fraudulent,” Bellamy said.
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EV Energy Partners, L.P. (EVEP) tried to sell its strong land position in the Ohio Utica shale, a sale which was expected to be completed by the end of 2012 and which still remains incomplete, leading investors to speculate on the reasons why and weighing down on the oil and gas MLP’s stock valuation, says Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.
“[The sale] did not get completed, and there is widespread speculation about why that did not occur. We remain very positive on valuation on the expectation that ultimately those 150,000 net acres of royalty interest and a midstream investment that EV has in Ohio will bear fruit and will prove to be very valuable,” Bellamy said.
Bellamy says the sale of the unconventional shale acreage still cannot be determined, but EVEP‘s current stock price provides a point of entry for those interested in value, especially as the general MLP group’s valuation remains strong.
“The timing on a potential sale to another party is somewhat uncertain, and the stock has drifted lower this year as expectations around that sale have continued to falter in contrast to the rest of the MLP group, which is up pretty strongly this year. So that’s been disappointing, but we still like it, and we still think there’s pretty strong value there,” Bellamy said.
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Buffalo Wild Wings (BWLD) has been subjected to volatility on commodity costs as wing prices increased rapidly and suddenly, and BWLD is managing the price increase by launching initiatives to improve in-restaurant service and increase menu prices up to 6%, says Stephen Anderson of Miller Tabak + Co., LLC.
“They don’t contract for wings; they buy them in the spot market, so they are more subject to volatility on commodity costs…They have a couple of initiatives to improve their in-restaurant service, but I think as they try to adjust staffing levels that’s going to be a drag on margins at least through the next one to two quarters,” Anderson said.
Anderson says commodity costs will remain a factor throughout the sector, but restaurants can manage the volatility with judicious, gradual price increases. With Buffalo Wild Wings‘ scramble to put together a 6% menu price increase, there is a concern that the company may lose their value proposition in the casual dining sector, Anderson says.
“That is one of the reasons why Buffalo Wild Wings‘ growth has been so dramatic in recent years; they certainly cater to the wings, beer and sports crowd, but I think they developed a secondary audience of young families with kids — the Little League families, if you will — who have found it a less expensive alternative than even the traditional midscale bar and grill names. I think others like Chili’s (EAT) are starting to capitalize on value; they’ve reduced costs to the point where now Chili’s — Brinker International — and more recently Red Robin (RRGB) are able to compete on price,” Anderson said.
Craft Brew Alliance (BREW) has partnered with Craft Can Travel! to distribute their brands across the Atlantic into Europe, ready to tap into international customers’ growing interest in the variety of flavors of U.S. craft beer and beginning to position the brewery in the international market for the long term, says Terry E. Michaelson, CEO of Craft Brew Alliance.
“What we became aware of is there’s certainly starting to be an evolving desire from a number of European countries to have craft beers from America,” Michaelson said. “What was important for us is that we had a strategy that we believe worked long term and that could really establish our brands over a long period of time and make a significant contribution to our business.”
Craft Brew Alliance chose to partner with Craft Can Travel! because of their expertise in the international beer industry. BREW is focused on leveraging this expertise while still remaining centered on the U.S. market, Michaelson says.
“Partnering with [Craft Can Travel!] allowed us to leverage their expertise, but equally as important, not dilute our resources that are focused on our priority, which is the U.S. market. We think we’ve got the right expertise. We think we have the right strategy with taking it slow and developing our brands really for the long term and not delevering what we’re trying to accomplish in the U.S.,” Michaelson said.
Chipotle Mexican Grill (CMG) is expected to accelerate same-restaurant sales starting in the second quarter of 2013, and traffic is not expected to crash despite menu price increases at this fast casual Mexican food restaurant, says Stephen Anderson, Analyst at Miller Tabak + Co., LLC.
“Since the beginning of the year, one of my favorite names has been Chipotle. I think it is a name that really got beaten up; the valuation was a concern 12 months ago. I certainly don’t think that’s the case today, and a strong argument can be made for the stock — I don’t think they’ll see $400 this year, but I think at least in the mid-$300s; our target is $360,” Anderson said.
Anderson expects further moderation in commodity costs, which would result in a competitive advantage for CMG over its peers. He adds that Chipotle has a second growth concept beyond its burrito franchise, a Southeast Asian bowl meal concept called ShopHouse that may provide another layer of growth.
“For Chipotle, 70% of their food costs are done on a non-contract basis. That means if commodities moderate, they’ll see the more moderate commodity costs or lower commodity costs earlier than some of their peers. Also, it has a second concept called ShopHouse. I think that will provide an additional layer of growth. I’m not sure it’s a 1,000 or 1,500-unit opportunity, but I do think there is a potential for about 300 to 400 units at least in the next 10 to 12 years,” Anderson said.
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