MLPs: A Great Opportunity In The Near Future, Just Not Yet

  • Shares of various MLPs have been battered over the last year.
  • It’s a classic case of the baby being thrown out with the bathwater. Attractive MLPs with strong balance sheets have been sold indiscriminately along with over-leveraged operators.
  • Soon investors with dry powder will be able to pick up excellent MLP assets for pennies on the dollar.

Crude continues its relentless march downward, blowing through predicted bottoms and calls for reversals. Its fall has surprised many and devastated a few. For us, this has been completely expected. We’ve been calling for $20 oil since 2014. We know this downward trend won’t be over until there’s blood in the energy streets… total capitulation… which is why we have our target for oil at $16/bbl.

All is not doom and gloom though. For the investor who is patient, there will be some amazing opportunities available in the oil and gas space in the coming months.

One of the areas we’re most intrigued by, besides buying outright crude futures, is the master limited partnerships (MLPs) segment. These companies operate mid-stream energy assets such as storage and pipelines.

MLPs have been killed over the last year. Many have sold off more than the exploration and production (E&P) companies that have direct exposure to the price of oil. On the surface this seems completely illogical. MLPs transport and store oil. They’re essentially toll-road operators in the energy space that collect a fee regardless of the price of energy. But in reality, lower oil prices affect them indirectly. When crude prices are low, there is less oil being transported and stored, so they collect fewer fees. 

However, we believe the drop in revenues don’t tell the whole story why many MLPs have sold off 50-80% over the last 12 months. Instead, we think it has a lot more to do with liquidity. Many closed-end funds invested in MLPs have been forced to sell their holdings due to margin level restrictions. Every sell-off in the MLP market begets another bout of forced selling by the funds that hold their shares… creating a liquidity issue. Investors want to get out of anything that deals in Texas tea – which is understandable if they’ve continuously been on the wrong side of this trade over the last 18 months.

It’s a classic case of the baby being thrown out with the bathwater. Attractive MLPs with strong balance sheets have been sold indiscriminately along with those over-leveraged operators that will likely go bust in the coming months.

Remember Buffett’s advice, “Be fearful when others are greedy and greedy when others are fearful.” It’s getting close to that time when it’s going to pay to be greedy. Investors with dry powder will be able to pick up excellent MLP assets for pennies on the dollar.

Some names we’re looking at are Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP). Both have strong balance sheets, positive earnings, and solid dividends that face little chance of being cut. Also, directors at both companies have been scooping up shares, with one director at EPD buying over $100 million worth of stock just this last month. This is a strong sign of confidence for those investors thinking about buying in.

There will be immense value in the energy sector in the coming months. You need to be patient and wait for the final washout in oil and a bottom to form. MLPs that are a great bargain today will be an even better buy then. And investors who are standing by with free capital have the opportunity to make a killing over the coming years.

 

 

MLPs: A Great Opportunity In The Near Future, Just Not Yet

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.