Energy Expert's Blue Chip MLPs

06/01/2015 10:00 am EST

Focus: MLPS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Given the uncertainty and volatility in energy, investors interested in master limited partnerships should focus on blue chips in the field, according to Elliott Gue. Here, the editor of Energy & Income Advisor discusses the sector and highlights a trio of favorites offering quality assets and strong financials.

Steven Halpern: Our guest today is the advisory industry’s top energy sector expert, Elliott Gue, editor of Energy & Income Advisor.  How are you doing today, Elliott?

Elliott Gue:  I’m doing well.  Thanks for having me on the show.

Steven Halpern:  Our topic today will be master limited partnerships, and within this sector, you strongly suggest that investors today focus on blue chip MLPs that only could be called indispensable infrastructure. Could you expand on this?

Elliott Gue:  Sure, well, one of the things we’ve seen over the last year or so is the collapse in oil prices. Crude oil prices have come down in the US from well over $100 a barrel all the way down into the 40s and now back up around $60 a barrel. We actually think that that’s going to continue for some time.  

You’re going to see continued weakness in commodity prices over the next one or two years because of this rash of oversupply of crude oil being produced from shale fields around the US, in particular.  

With that in mind, you want to stay away from any companies that have an awful lot of leverage to oil prices and to the price of oil or natural gas.  One of the areas we like a lot is to focus on the midstream space.  

These are companies that own pipelines, oil storage terminals, natural gas storage caverns, and stick with the larger MLPs that own these high quality assets that are going to get utilized whether oil is at $100 a barrel, or $50 a barrel, or even lower than that.  

It doesn’t really matter to a pipeline owner what the price of oil is moving through their pipeline.  It really matters about volume.  

A lot of these high-quality names are still going to have plenty of volume growth and they’re going to earn very nice fees from that and it really doesn’t matter to them whether the price of oil is high or low.  

Steven Halpern:  Now one company you point to is Enterprise Products Partners (EPD), which, you note, boasts an unparalleled asset base and a management team that you say always seems to stay ahead of the crowd. Could you tell us a little more about Enterprise?

Elliott Gue:  Sure, Enterprise is the largest publicly-traded MLP out there. This company just has a long history of being a little bit ahead of the crowd in terms of where they go next—the types of assets that they own—and I’ll give you an example.  

Right now, I think one of their biggest growth areas is US energy exports. The US—ten years ago—was really seen as primarily an energy importer, in other words, we consumed a lot more than we produced.  

Many people thought it was going to remain that way over the long-term because US oil production was falling and consumption was rising, but, of course, the shale boom has changed all of that.  

What we’re seeing is that the US is now in a position to export a lot of energy commodities.  Now, the US government prohibits the export of crude oil directly, right now.  

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However, you can still export refined products and we can also export a number of other energy-related products like propane, butane, ethane even, as well as a type of oil-like commodity, very light version of oil called condensate.  

Enterprise has really been at the forefront of enabling all this US energy exports. They’ve built terminals on the Gulf Coast that allow us to export propane, and butane, and other natural gas liquids.

And last summer, they actually got a special ruling from the US Commerce Department, which allows them to export condensate directly without processing it, but directly export US condensate out of the US Gulf Coast, which they needed a special waiver from the commerce department to get around the crude oil export ban.  

This is a special case, but this could become a really huge market over the next few years because all the condensate that’s produced in major shale fields like the Eagle Ford shale with southern Texas.  Enterprise is really at the forefront of that US export movement.  Again, this actually benefits from lower US oil prices and lower US energy prices.  

The main reason that people want to buy US exports of condensate is because condensate prices here in the US are so much lower than they are virtually anywhere else in the world.  So, in the US we have this huge supply of condensate from fields like the Eagle Ford.

It’s depressing prices.  It makes an awful lot of sense to put that cheap condensate on a tanker here in the US and ship it to Europe where they get significantly higher prices.  

Steven Halpern:  Now, you also highlight Enbridge Energy.  What’s the story here?

Elliott Gue:  Enbridge Energy Partners (EEP). This is an older MLP that’s been around for a long time.  For many years, they really showed no distribution growth whatsoever.  

One of the main drivers in MLP valuation is their ability to grow their payout, their quarterly distributions over time, but we see a lot of growth driver now for Enbridge Energy Partners.  

In particular—and this is kind of a near term catalyst—their parent company, which is called Enbridge (ENB)—it’s a Canadian firm—they own a number of assets in the US, mainly pipelines and other basic midstream and infrastructure related to the pipeline.  

They’re actually exploring the option of dropping down all of these assets, and what that means is selling these assets directly to the MLP, which is symbol EEP.  When that happens, that’s going to generate billions and billions of dollars of additional annual cash flow for Enbridge Energy Partners, which it can use to actually increase its distribution to unit holders.  

I was just up at the NAPTP conference—the National Association of Publicly Traded Partnership conference in Orlando, Florida—and one of the things that they indicated there was that they’re going to probably announce exactly what they intend to do in terms of these drop-downs by July of 2015, sometime in July of 2015, so really, that’s a great near-term catalyst.  

I think as soon as they announce their intention to drop down all these assets to Enbridge Energy Partners, you’re going to see a big bump in the distribution there and I think a big bump in the underlying MLP as well.  

Steven Halpern:  Finally, as a third pick among MLPs, you suggest Shell Midstream Partners (SHLX). What do you like in this situation?

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Elliott Gue: Shell Midstream Partners is a classic dropdown MLP, meaning that they’re a company with a very strong parent.  As you can probably imagine from the name, the parent company is Royal Dutch Shell (RDS-A), which is an Anglo-Dutch super, major, giant oil producer, and basically, Shell owns tons of assets in the United States.  

They own things like the Colonial Pipeline, which carries gasoline from the Gulf Coast to the northeast. They own the Ho-Ho Pipeline, which carries oil from Houston, Texas to Houma, Louisiana. They own all these major assets in the US, mainly all assets that are Midstream-orientated that are very much fee based, so they generate fees regardless of the price of oil.

They’ve created this MLP called Shell Midstream Partners. This thing went public at the end of last year, so in November of 2014. Over the next few years, Royal Dutch Shell plans to sell more and more of their assets into this MLP.

And again—just like I said with Enbridge—as they sell assets to the MLP, you’re going to see Shell Midstream increase its distributions at a steady clip.

So, right now, Shell Midstream yields a little bit less than your average MLP around 1.8% to 1.9%.  However, I think they’re going to be able to grow their payout at a 15% to 25% annualized base over the next five years or so.

Steven Halpern:  Now, interestingly, instead of worrying too much about near term downside risk, you see a potential silver lining should the sector pullback. Could you explain to our listeners what you mean by "dream prices" and why you would consider any near-term pullback in MLPs as a longer-term buying opportunity?

Elliott Gue: You know, one of the biggest challenges that we’ve had in recommending MLPs over the last couple years is simply that a lot of the best names were pretty expensive. There was a lot of excitement a year ago before the collapse in oil prices about the sector and investing in the sector.  

It was a very, very popular space to be, so a lot of the MLPs out there, the better names in particular, were very, very expensive and what we’ve seen is with oil prices coming down, the whole sector has kind of corrected, and as a result, what we’ve seen is that good MLPs are getting thrown out with the bad MLPs, the babies being thrown out with the bathwater, if you will.  

We’re finding a lot of higher quality names right now that are actually trading at fairly solid prices.  

However, going forward, I think you’re going to see additional downside spikes in oil prices and when you do, you’ll probably see MLPs sell-off, regardless of the fundamentals. They’ll sell-off because oil prices are going down even if they have absolutely no leverage whatsoever to the price of oil.  

One of the techniques we like to use is we like to set dream buy prices. These are prices for various MLPs where we really want to load up on these names.  

Often times it’s 10%, 15%, or 20% below the current price, but I think if we get a big sell-off in oil this summer or later on this year, which I expect, that will be an excellent opportunity.  

You might actually be able to pick up some of these high quality names like Enterprise, like Enbridge, and like Shell Midstream, significantly below the current price, so that’s what we’re looking for. Pick up the high quality names when the whole sector’s down for no good fundamental reason.

Steven Halpern:  Again, our guest is Elliott Gue of Energy & Income Advisor. Thank you so much for joining us today.

Elliott Gue:  Thank you for having me.  

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