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Marlin: Boutique Buy Among MLPs

12/11/2014 8:00 am EST

Focus: MLPS

Keith Fitz-Gerald

Chief Investment Strategist, The Money Map Report

In the late 1980s, the House of Saudi brought the rest of the world to its knees by increasing output and lowering prices to the point where global producer profitability got crushed, recalls Keith Fitz-Gerald, editor of Money Morning.

Like generals who are prepared to fight the last war, Saudi ministers have totally underestimated the impact of this development. My take is that the Saudis have just made the biggest strategic ‘pricing error’ in the kingdom's history.

What they're missing is that the cost of shale oil production is getting lower all the time. The other thing to consider is a data point from the IMF. That agency estimates that Saudi Arabia needs oil prices to average $89/barrel to balance their budget.

Essentially, that means the Saudis are punishing themselves. The country cannot withstand a long-term drain on its finances. Other OPEC producers are going to fare even worse.

The way to play this is to buy into so-called midstream assets. These are the companies responsible for gathering, processing, and piping oil around the country.

They're like toll highways. You dump crude in one end of the network, transport it, and unload it at the other, and they collect the ‘toll’. The actual price of the crude and natural gas being carried is largely moot.

My favorite at the moment is Marlin Midstream Partners LP (FISH), a $300 million small-cap MLP with highly concentrated assets and operations in Texas, Wyoming, and Utah.

This boutique player targets smaller projects that are profitable. Already, FISH has a profit margin of 29.05%; almost 6 times better than the industry average of 5.7%. And that's just one way it's crushing the competition.

Return on equity is 13.84%, versus only 11.50%. FISH also carries very little debt. And FISH sports a trailing P/E ratio of 10.87. So it's very undervalued. Best of all, the yield is an appealing 8.30% right now.

There are two potential drawbacks, but neither is a show stopper in my opinion.
First, average daily volume is only 45,000 shares, so the stock can be jumpier than the bigger, better-known, more liquid MLPs.

Second, FISH operates using a series of shorter-term contracts, many of which have yearly renewal clauses. So, there may be some volatility in upcoming cash flow. However, I'm willing to overlook that, because I don't think it will impact dividends.

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