MLPs as an investment category have been whacked severely year-to-date according to the Alerian MLP Index, which has fallen 42.9% through December 4th! As a contrarian by nature, I am always looking to get into a potential investments that have gotten beaten up provided that nothing fundamentally has changed to permanently impair the investment category.
I am not close to being an expert in this area. So as I began to get more intrigued with MLPs I reached out to a friend, Jeremy Hill, Old Blackheath Companies, who is and who was kind to share his views. Here you go:
As for MLPs, I don’t think there is much of a catalyst other than the stabilization of the price of oil. That seems odd because it assumes that pipeline capacity is a function of the price of oil. It is not. It is a function of how much oil is piped. So far, pipelines continue to be busy. Where the pipelines (MLPs) go wrong is that they have frequently become vertically integrated oil and gas companies that call themselves pipelines and they have a lot of debt. The idea that because the price of oil is down, less oil will be sucked out of the ground, therefore less oil pumped and piped and therefore less revenue/profits for the pipelines is intuitive. It is intuitive investing, not math-based investing.
Take a look at Kinder Morgan. Although they are not an MLP, they are lumped in with the MLPs. They cut their dividend severely and the stock is doing nothing but going up. For a pure reversion to the mean type of investment, I think KMI may be interesting at these levels. Their credits may be even more interesting. And, possibly selling puts could be a nice strategy for some of these companies.
The rub, of course, is that so long as investors (largely retail in MLPs) conflate the oil price/MLP equation, these stocks have a lot of embedded gamma risk. The real risk to these stocks is that banks stop financing them. I also think that there are likely to be more dividend cuts. In sum, I wouldn’t step into MLPs any time soon.
Thanks, Jeremy! We will continue to monitor MLPs for possible investment opportunities, but it looks like a 2016 event at this point.