Sunday, October 4, 2015

Chasing Yield: September Was the Worst Month In History For Master Limited Partnerships

We have not been fans of 'yield' investments for quite a while. As an example, former king of the MLP's (before the roll-up) Kinder Morgan, which was up over 5% on Friday, is still down 27.7% since the Financial Times' Izabella Kaminska posted "Kinder Morgan, MLPs and the sell case", linked in our "The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)".

First up, 24/7 Wall Street:

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 negative?”...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 stocks.
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%. 

Volatility 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.

“We 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, Williams Companies (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.

September’s 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.
Lower oil (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 for Conning. 

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
KMI Kinder Morgan, Inc. daily Stock Chart
The week the 2014 roll-up was announced the stock jumped and then settled around $41.
No hurries, no worries.