With the crash in oil, the whole energy sector has sold off hard. I’m not interested in trying to catch a falling knife among the drillers or in the exploration and production area right now. Too much risk and I have no clue of the duration and severity of the oil selloff, which I would need to invest there.
But a search for babies among the bathwater might turn up some opportunities in the Midstream MLP space. Midstream MLPs are often described as toll roads that primarily transport and store energy (oil, natural gas, natural gas liquids, and refined products). Their cash flows are not, at least in the main, dependent on commodity prices. They are dependent on long-term, volume-based contracts with producers that sometimes have PPI-linked tariff increases.
Several conservative pipeline-and-storage MLPs with resilient cash flows, good distribution coverage and growth, and conservative balance sheets look pretty cheap right now. Jeff Saut sees this area as being attractive as tax-loss selling season winds down. Here is Jeff’s take:
Over the weekend I came across an interesting oil to gold chart that suggests while we are not there yet, we are very close to a bottom (maybe third time is the charm?). Accordingly, I continue to think buying the midstream MLPs into year-end makes sense. I would also note that some of the names mentioned by our fundamental analyst on the midstream MLP conference call last week already look to have bottomed.
Some Midstream Names Worth A Look from Forbes
John Dobosz at Forbes lists some MLPs to take a look at in the Midstream space:
Morningstar’s Peters Seeks Safe and Growing Dividends in Energy
Josh Peters likes conservative dividend payers in the energy area. His first focus is dividend safety and resilience of cash flows, along with dividend growth. He lists 4 favorites in the energy sector: Chevron (CVX), Magellan Midstream Partners (MMP), Spectra Energy Partners (SEP), and AmeriGas Partners (APU).
MLPs Have Tax Complications
You should be aware that MLPs are structured as partnerships, and as such you will get a Schedule K-1 instead of a 1099 Dividend form for taxes. Some of the distributions are considered a return of capital because of the pass-through of depreciation deductions and such. Consulting your tax adviser is a good idea if you are new to this area.
Disclosure: I currently own APU, MMP and SEP.
Other Worthwhile Reads:
“Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.”
– Howard Marks