MLPs: How Long Must We Wait?

12/17/2015 9:36 am EST

Focus: MLPS

Michael Berger

President & Founder,

Michael Berger, of,expects oil prices to recover in late 2016 and all of 2017. As such—while there are no near-term catalysts in sight—Michael shares some names in the MLP space he expects to outperform the market on a longer-term basis.

The master limited partnership (MLP) sector has seen heavy weakness due to the weak oil price environment and the sell-off has been driven by fundamental macroeconomic concerns and technical selling. 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 the last month, the index has substantially underperformed the broader equity market, declining 21.6%, relative to a 1.3% loss in the S&P 500 (SPX).

Weakness Driven by Fundamental Concerns and Technical Selling

Investor concerns regarding the macro commodity environment have been more pronounced in recent weeks as WTI broke below $40 a barrel. The fundamental uncertainty pertaining to when and if oil prices rebound in 2016 are driving MLP investor fears as it relates to the impact on future cash flow growth. This concern has significantly increased the cost of equity capital for MLPs and raises concerns with regard to whether MLPs will be able to finance growth initiatives in an accretive manner.

When it comes to the technical aspect of this sell-off, it is not surprising to see tax-loss selling as investors look to offset potential gains in other sectors. Fund redemptions at dedicated MLP funds have increased the selling pressure and the sector has been viewed as a short target for hedge funds. While it is impossible to predict when these technical selling events will end, we think most of the technical selling pressure will have run its course once the calendar hits 2016.

We think the fundamental and technical concerns are overblown and we expect oil prices to recover in late 2016 and all of 2017. A recovery in oil prices will provide significant relief to cash flow and growth plans.

Valuations Are Attractive but No Near-term Catalysts

Although the MLP sector looks attractive from a historical perspective, there are no near-term catalysts in sight. We do, however, expect to see a rally once the technical selling pressure is over.

Over the long-term, we expect to see MLPs trade much higher than current levels as organic and inorganic growth drive investors to the companies that have the most visible path to creating long-term value. 

Remain Constructive on Long-term Outlook

We continue to prefer MLPs with geographically diverse asset portfolios, stable/visible cash flow profiles, ample liquidity to capitalize on growth initiatives, low-risk organic growth projects, manageable capital needs, and experienced management teams.
Some of the partnerships that we expect to outperform the market on a longer-term basis are: Antero Midstream Partners LP (AM), Enterprise Products Partners LP (EPD), Energy Transfer Equity LP (ETE), Rose Rock Midstream (RRMS), Plains GP Holdings (PAGP), Tesoro Logistics (TLLP), Targa Resources Corp. (TRGP), and Vanguard Natural Resources (VNR).

Michael Berger, Founder and President,

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