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3 MLPs to Buy for 2018

By Matthew DiLallo - Dec 30, 2017 at 10:47AM

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These midstream companies have a mountain of expansion projects coming on line, which should drive cash flow higher.

This past year has been a disappointing one for investors in master limited partnerships (MLPs). While some MLPs bested the market, most lost value. However, that trend could change in 2018 as an improving oil market should fuel improving financial results for the sector.

Some MLPs have additional catalysts on the horizon that could enable them to deliver top-tier performance in 2018. Three with this visible upside are Enterprise Products Partners (EPD -1.22%), MPLX (MPLX -0.23%), and Crestwood Equity Partners (CEQP -0.58%), which makes them great MLPs to buy for 2018.

Snow covered pipes coming from a natural gas field with the sun in the distance.

Image source: Getty Images.

Growth projects should start paying dividends

Enterprise Products Partners disappointed investors this year, falling about 2% even though distributable cash flow finally reversed its slide. Yet several headwinds kept cash flow from recovering as much as it could have, including weaker volumes flowing through its systems due to lower oil prices and the impact from Hurricane Harvey. That storm also caused a delay in the start-up of one of the company's largest projects.

However, those headwinds should fade away in 2018: Enterprise expects to benefit from the $4.2 billion in growth projects it completed at the end of 2017, which should provide a noticeable boost to cash flow early in the year. In addition, the company expects to finish another $2.5 billion in projects throughout 2018, which will provide some incremental income. That rapidly rising cash flow has the potential to drive Enterprise's value much higher in the coming year.  

A transformational year awaits

MPLX, too, is coming off a somewhat lackluster year. While units rose about 3.5%, that's a pittance compared to the broader market, which soared to new heights in 2017.

One of the weights that seemed to hold MPLX back was uncertainty about its future direction since its parent company Marathon Petroleum (MPC -2.37%) was weighing its strategic options. But toward the end of the year, the refining giant decided on a path forward, which includes dropping down its remaining midstream assets to MPLX for $8.1 billion and eliminating its incentive distribution rights for $10.1 billion of new units in its MLP. The first transaction will provide MPLX with a boatload of new assets that will immediately boost cash flow while further diversifying its business. The second deal will eliminate an ever-increasing fee, which should reduce the MLP's costs ahead.

MPLX is also in the process of completing several organic expansion projects. The growth from those assets, when combined with the dropdowns from Marathon, should drive cash flow significantly higher in 2018. In fact, MPLX expects that it can deliver double-digit distribution growth in the coming year, which could fuel a similar increase in the company's value. 

A person in a hardhat standing near a stack of pipelines.

Image source: Getty Images.

Finally turning the corner

Crestwood Equity Partners performed unremarkably in 2017, with units ending the year roughly flat. That's not too surprising since cash flow declined due to asset sales the company completed to shore up its financial situation and finance growth projects. That said, those expansions should start bearing fruit in 2018. The company expects cash flow to rise from about $220 million this year to as much as $260 million in 2018. If that prediction pans out, Crestwood could start increasing its distribution in the second half of the year.

Another thing that makes Crestwood a compelling buy right now is its valuation. Units currently trade at a discount to rival MLPs, which is one reason why Crestwood yields a jaw-dropping 9.5% while Enterprise and MPLX, for example, yield 6.3% and 6.1%, respectively, even though all pay out a similar percentage of their cash flow. That valuation gap could narrow in 2018 if the company restarts distribution growth.

It's all about the catalysts

Since 2017 was a down year for MLPs overall, it's possible that 2018 could be a bounce-back one for the sector overall, especially if industry conditions continue to improve. Enterprise, MPLX, and Crestwood have the added benefit of clear catalysts on the horizon, which could drive their values higher than rivals in 2018.

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Stocks Mentioned

Crestwood Equity Partners LP Stock Quote
Crestwood Equity Partners LP
$24.15 (-0.58%) $0.14
Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
$82.48 (-2.37%) $-2.00
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$24.26 (-1.22%) $0.30
MPLX LP Stock Quote
$28.95 (-0.23%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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