Lower Oil? No Problem For These Stocks, Says Wunderlich

In a report published Wednesday, Wunderlich analyst James Dobson discussed which stocks he finds attractive in a low priced oil environment.

Dobson noted that since June 30, the unit prices of upstream MLPs within his coverage have dropped by an average of 22 percent. The analyst added that even though the sector is plagued with heavy debt and inadequate long-term hedging, the sell-off in the group is overdone unless oil prices remain around $50 through year-end 2015 and into 2016.

Dobson said that Wunderlich's exploration and production research team have placed a new crude oil price forecast (WTI) of $65 per barrel in 2016 (versus a prior estimate of $70), slightly exceeding the consensus crude oil forecast of $63.97 per barrel.

"Though some MLPs have the 2016 hedging and liquidity to wait and see if commodity prices improve, we believe most upstream MLPs will have to see higher crude oil prices by late 2015 in order to avoid another round of distribution reductions in early 2016," Dobson wrote. "The seven percent reduction in the 2016 crude oil price negatively impacts distributable cash flow per unit by about four percent on average for the upstream MLPs in our coverage, after considering about 52 percent of total production is natural gas (no change to natural gas price forecast) and about 54 percent of total production for our coverage universe is hedged for 2016."

Buy Vanguard Natural Resources, Memorial Production Partners And Legacy Reserves

According to Dobson, Upstream MLPs are trading at an average implied 2016 EV/EBITDA of 7.0x and a distribution yield of 19.6 percent. If crude will average below $55 per barrel in 2016, some upstream MLPs will need to reduce their distribution. However, the analyst suggested that these reductions are "already partially reflected" in some unit prices.

Dobson "continues to favor" Vanguard Natural Resources, LLC VNR, Memorial Production Partners LP MEMP and Legacy Reserves LP LGCY.

Dobson further explained that the distribution of these Buy-rated upstream MLPs (except Memorial Production Partners) are "covered and unlikely to be reduced in most scenarios" except for a scenario whereby crude trades at $55 per barrel or below in 2016.

On the other hand, Memorial Production Partners will likely consider a reduction in its LP unit distribution, though this may not be a near-term event.

Dobson also reiterated a Buy rating on LRR Energy LP LRE given its pending merger with Vanguard which is expected to be completed by the end of September.