Time to Put MLPs Back on the Radar Screen?

08/14/2015 9:00 am EST

Focus: MLPS

Michael Berger

President & Founder, Technical420.com

A number of oil companies have been forced to cut their dividends, but if oil prices manage to rebound and this weakness proves to only be temporary, it could be a rare opportunity to consider investing in Master Limited Partnerships (MLPs), says Michael Berger, of Technical420.com.

Plunging oil prices have had a ripple effect across the energy sector and it has caused a number of energy companies to cut their dividends.  This has forced research analysts to lower their projections and caused investors to sell their investments. But if oil prices manage to rebound, stocks prices and analyst earnings projections will likely begin to trend higher as well. So how should investors position themselves during these turbulent times?

If this weakness is only temporary it could be a rare opportunity for investors to invest in Master Limited Partnerships (MLPs) that not only have growth potential, but also offer a substantial dividend.

The Alerian MLP Index (AMZ) is comprised of a diversified group of 50 MLPs and it is often used to measure the strength of the industry. During 2015, the index has substantially underperformed the broader equity market, declining 21.9%, relative to a 1.1% gain in the S&P 500 SPX. The Alerian MLP index has also underperformed other energy stock indices like the S&P Oil Exploration & Production Index (EPX)—which is down 21.0%—and the Oilfield Service Index (OSX) which has fallen 14.1%.

Although the index is considered to be less volatile, the fear of rising interest rates, when coupled with production volume and price realization worries helps explain the severity of this sell-off. This is even more relevant due to recent commentary from the Fed, the rising value of the dollar, and the 10-year Treasury finally re-testing the 2.5%-level less than a month ago.

Investors need to be selective when investing in the MLP industry. Investors should target companies that have the following characteristics: 1) Geographic diversity, 2) Stable and visible cash flow (the more fee-based, the better), 3) Visible growth backlog, 4) Ample liquidity to capitalize on organic and inorganic growth initiatives, and 5) Experienced management team.

Two Partnerships to Watch

Antero Midstream Partners LP (AM) has held up better than most of its peers during 2015 (down 17.1%). The company offers a 2.8% dividend yield and its assets are strategically located in the Utica and Marcellus basin, which is levered to the price of natural gas, not oil. AM has a supportive relationship with Antero Resources (AR) and a visible growth backlog that should facilitate 25-35% growth in cash distribution for several years. As of March 31, 2015, the company had no debt and $1.2 billion in existing liquidity. In short, Antero Midstream is the best play on booming Marcellus gas production potential and associated infrastructure constraints.

Energy Transfer Equity LP (ETE) has outperformed its peers and is up 2.7% during 2015. The company has a family of companies that own and operate approximately 71,000 miles of natural gas, natural gas liquids, refined products, and crude oil pipelines. ETE offers a 3.6% dividend yield and has visible growth due to the synergies from its merger with Regency Energy Partners LP. A potential catalyst for ETE is moving toward a C-Corp structure, which would attract institutional investors.

Selectivity Is Key

Many analysts have used the “it may still be too early to catch the falling knife” metaphor on energy stocks and they may be right. It, however, is the time to put them on your radar screen. Many investors, especially young investors, missed out on the energy bull market. This pullback has created a rare opportunity to invest in a core investment portfolio holding that offers both growth and income.

Michael Berger, Founder and President, Technical420.com

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