September Worst Month in History for Energy MLPs: 3 to Buy Right Now
Needless to say, the past six weeks have been gut-wrenching for investors.
What could possibly be worse? The month of September for energy master
limited partnership (MLP) investors. According to a new research report
from the MLP analysts at Merrill Lynch, depending on the final tally,
September was possibly the worst month in history for the MLP sector.
They also pose the question, “Could sentiment possibly get more
Barron's Current Yield column looked at the carnage on Friday:
Wild Swings Buffet MLP Investors
Many factors contributed to the 26% drop in
these energy infrastructure companies over the past year. Unfortunately
those factors aren’t going away any time soon.
Master limited partnerships (MLPs) have long
been prized by income investors for their attractive yields, favorable
tax treatment, and relative stability. But not only have these
energy-infrastructure companies fallen 26% so far this year; in the past
week they’ve traded with volatility akin to money-losing Internet
The benchmark Alerian MLP Index
fell by 6% on each of two consecutive days early last week, reminding
some portfolio managers of the worst days of the 2008 financial crisis.
At Tuesday’s close, the index was down nearly 50% from its 2014 highs.
It rebounded in the remaining three days of the week as value buyers
stepped in, but September was still off a punishing 15%.
is here to stay for MLPs. That doesn’t mean there aren’t opportunities
in the sector, which is much cheaper than usual and currently yielding
near 8%. But investors should beware that as energy prices stay low, and
maybe go lower, the risk profile for the sector has gone up.
don’t think the coast is clear from here,” says Matt Sallee, a
portfolio manager at Tortoise Capital Advisors. “We expect it to remain
pretty choppy for the rest of the year.”
A major catalyst for last week’s selloff was the announced merger of two midstream giants,
(ticker: WMB) and
Energy Transfer Equity
(ETE). The terms of the deal weren’t as favorable as investors
expected. Williams fetched a lower price, and Energy Transfer will have
to take on $6 billion in new debt, which worried investors. More MLP
consolidation is expected, thanks to lower crude-oil prices, and
investors may not love the terms.
decline was exacerbated as retail investors exited mutual funds,
forcing managers to sell to meet redemptions. Plus, because prices fell
so much so fast, some closed-end MLP funds ran up against leverage
limits and had to sell assets to pay down debt. “We had funds selling
into a very thin market,” says Charles Earle, head of closed-end fund
research at Gates Capital.
(even if it doesn’t directly affect an MLP’s revenue stream), trouble in
the high-yield market (MLPs are heavy borrowers), and a weak stock
market also added to the selling pressure. Those factors may be here for
a while, too. Crude has to settle down for MLPs to return to more
normal prices, says Marcus McGregor, who runs the MLP equity strategy
AN ARTICLE QUESTIONING the
viability of some MLPs that was widely circulated on the Internet
didn’t help, say fund managers. It highlighted dynamics facing mainly
exploration and production companies, known as upstream MLPs, several of
which have had to cut distributions to investors. But midstream MLPs
(pipeline, storage, and transportation companies), where most investor
interest lies, mostly promise stable distributions that they can cover
with current cash flows. “Midstream companies have different economics,”
says Greg Reid, president of the MLP Complex at asset management firm
Salient Partners. “People are lumping them all together.”...MORE