Is It Over for Commodities?

03/13/2014 7:00 am EST

Focus: MLPS

Michael Peterson

Managing Director and Senior Equity Analyst, MLV & Co.

Specialist in energy and natural resources, Michael Peterson, discusses his 2014 outlook for commodities and suggests a way to reallocate positions in the energy sector.

TERRY SAVAGE:  I’m Terry Savage for and we’re here talking with Michael Peterson, senior analyst at MLV and Company, a specialist in energy and natural resources.  I’ve been waiting to talk to you.  Is it over for commodities?  I mean, forget gold and silver, but given energy and some of the other – copper, it seems to me while waiting for inflation, the world is sort of spiraling into deflation and it’s showing up in commodity prices.

MICHAEL PETERSON:  I wouldn’t say that it’s over.  The gains that we’ve seen over the last number of years probably won’t repeat themselves, but to say that just because we’re not going up as fast as we have been in the past doesn’t necessarily mark an inflection so that we’re going to be heading south.  No, I don’t think the deflationary concerns are a reality.  I do think inflation will be at a lower rate and put less pressure on the broader economic circumstances.

TERRY SAVAGE:  What kind of a percentage exposure, the ordinary investor, someone with a retirement plan, should they have already reduced their exposure to commodities and energy?  Is it too late to reduce it now?

MICHAEL PETERSON:  Well, if you’re talking about a retirement portfolio, you’re going to be a little bit risk sensitive anyway so direct exposure to the commodity, I would argue you shouldn’t have a huge amount of that anyway.  Indirect exposure, I think you have a lot of ways to mitigate that risk.  I wouldn’t be taking allocations from energy and putting them elsewhere.  I would be reallocating within energy.

TERRY SAVAGE:  Aha, where in the energy sector for example is the play here?  As we are now entering well into 2014, we’ve seen the markets in general go down a bit.  What’s the play in energy?

MICHAEL PETERSON:  Three ways to make money in energy broadly speaking.  You can have price increases, you can have volume increases, or you can become more efficient and have margin growth.  I think the price increases aren’t going to be as great as they were in times past –

TERRY SAVAGE:  For producers?

MICHAEL PETERSON:  For producers.  Exactly.  I think the volume opportunity is great, some commodities more than others.  I think we’ll see more growth in oil, second natural gas liquids, and then lastly natural gas in terms of volume growth.  The last piece will be efficiency.  I think there are some gains to be had there as well.

TERRY SAVAGE:  Will you give us a few stats or ideas?  We’re understanding that you probably own positions in these, but give us some examples of those areas?

MICHAEL PETERSON:  Sure, absolutely.  Now I don’t own them because I cover them as an analyst.  I think master limited partnerships are a unique way to play energy.  We’re adjusting the risk down so for the retirement portfolio you just mentioned, this would be something that would be worthy of consideration rather than taking a future’s position in oil, for example.

TERRY SAVAGE:  Name one or two.

MICHAEL PETERSON:  Names that I think are very interesting:  Atlas Resource Partners is one, ARP is the ticker symbol.  This an upstream master limited partnership that is growing their portfolio with mature producing assets.  Mature assets have a more gentle decline portfolio which enables them to have known quantities which they can hedge out price with to ensure that they’re able to support distributions.  This is a yield focused vehicle and so they do everything that they can to de-risk the underlying action.

TERRY SAVAGE:  What kind of a yield are we looking at?

MICHAEL PETERSON:  For Atlas, we’re at about 8.5%.

TERRY SAVAGE:  You feel fairly comfortable with that yield through the rest of the year?

MICHAEL PETERSON:    You know I do.  I like the name specifically.  I would say within MLPs and within all investments, there’s going to be a risk reward relationship.  Upstream MLPs do have more moving parts.  Their fundamentals are more risky than a toll taking pipeline, for example.  I think the risk is appropriate based on the returns.

TERRY SAVAGE:  Alright, thank you.  Michael Peterson looking at MLPs for income in the energy sector.  I’m Terry Savage for

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