Wells Fargo Shuffles the Deck on 4 Energy Midstream Stocks

Those margins could be used to buy back some of the MLP’s common units. The analysts have raised their forecast on share buybacks by $50 million annually to $200 million in 2025, 2026 and 2027. A bullish scenario ($61 unit price) would have the PPI remaining elevated into 2023 and share buybacks rising to $300 million during the three-year period. The bearish scenario ($50 unit price) reflects a smaller PPI adjustment, butane blending margins in line with past averages and smaller share buybacks.

Risks to this outlook are primarily to the upside: FCF could increase to $211 million by 2025 and, even though the stock trades at a multiple of 10.7 times estimated 2023 EV/EBITDA (above the 9.7 peer-group average), Wells Fargo thinks this could “prove to be narrower than our forecast suggest if inflationary pressure persists” and the automatic escalators are engaged.

Magellan pays a distribution of $4.14 per common unit for an annual yield of 7.99%. The total shareholder return for the past 12 months was 14.6%.

Sunoco

The analysts have downgraded the common units of Sunoco L.P. (NYSE: SUN) from Equal Weight to Underweight and cut their $46 price target to $41. The analysts, however, believe that while current high prices have not yet affected demand or margins, “rising gasoline/diesel prices (which will likely continue on this trajectory over the summer, due to high crude oil prices, tight refining capacity, and strong export demand) will eventually lead to demand destruction and lower margins.” Wells also warned of inflationelated margin pressure and backwardation in the commodities market (near-term prices are higher than expected future prices).

As was the case with Magellan, the analysts offer bullish ($20 unit price) and bearish ($16 unit price) scenarios. if consumers demonstrate a willingness to pay more than $4.50 per gallon for gasoline, volume and margins for Sunoco could hold up better than expected. The company also has the “potential ability to offset the impact of demand destruction by higher margins / lower costs, [proving] our EBITDA forecast conservative.”

Sunoco pays a distribution of $3.30 per common unit, for an annual yield of 7.99%. The total shareholder return for the past 12 months was 27.6%.

Cheniere Energy Partners

Cheniere Energy Partners L.P. (NYSEAMERICAN: CQP) owns and operates natural gas liquefaction and storage and loading facilities along with a 94-mile pipeline that connects its Sabine Pass liquefied natural gas (LNG) operations with onshore interstate pipelines. Wells Fargo’s analysts have lowered the rating on the company’s common units from Equal Weight to Underweight, while maintaining a price target of $55. The downgrade is primarily a valuation function. The company’s common units trade at an EV/EBITDA multiple of 13.5 compared to an average of 8.6 among its MLP peers and 10.0 for its parent company, Cheniere Energy.

Investors seeking exposure to LNG have driven unit prices higher this year, and Wells Fargo says the company will “will allocate future excess cash flows to unitholders, in the form of variable distributions,” and that will support the share price. A bullish case ($56 unit price) reflects the completion of a third berth by the end of this year, adding 10 more cargoes to the Sabine Pass capacity. The bearish scenario ($48 unit price) assumes a more modest valuation and higher operating costs. The analysts also note that the benefits of increased capacity at Sabine Pass are likely to flow more toward the parent company.

Cheniere Energy Partners pays a distribution of $2.82 per common unit, for an annual yield of 5.69%. The total shareholder return for the past 12 months was 40.9%.

Originally posted at 24/7 Wall St.

By Paul Ausick