Back in February, I wrote an article titled “Invest based on Research not Emotions”. As the price of oil continues to fall, I wanted to revisit the points I attempted to make when I wrote this article. The premise of the article was based on energy-related MLP’s and the ability to continue to pay their current dividend. At the time of this article, the price of WTI Crude was around $98 per barrel. As I write this article the current price is just over $60 per barrel. Although this drop in oil prices might be good for the overall US economy, it is probably putting a damper on many investment portfolios. MLP’s or Master Limited Partnerships became a significant part of the average investor’s portfolio over the last 5-10 years for various reasons. One significant reason was the fact that these partnerships paid large dividends to their partners and that became an attractive way for retirees to generate income of their portfolio versus the traditional method of using various fixed income investments. Investors went in search of yield and found it with these investments. This worked great for years, but the market has shifted significantly against these investments and it’s time to make sure you aren’t holding the ones that may not make it through this selloff in oil. There are many MLP’s as well as common stocks out there that rely on the price of oil to be above a certain level in order for them to service their debt as well as pay the shareholder the current dividend. Over the last couple weeks, there have been a few of these companies announcing that not only would their dividend be cut, but suspended indefinitely. So how do you know which investments will survive and which ones will have to cut their income payments? I can only answer this with one word, Research. As an Investment Advisory firm, we run various research screens on a daily basis. It’s important for us to be on top of every investment we make for our clients, as well as our firm. We know that one of the riskiest areas to be invested right now is in companies that are dependent upon oil prices to stay above a certain level. One area that will be and is being affected the most is companies invested in US Shale. Why? The cost of Fracking makes these companies unprofitable when the price of oil falls below a certain level. Every piece of research I have read says that price can be anywhere from $35 a barrel to $75 a barrel.
The question every investor should know the answer to is what investments I currently own that may be affected by this price drop and can this investment survive if prices continue to fall. Please don’t ignore your portfolio hoping that oil will rebind. Based on supply and demand this fall in price is justified, and it was bound to happen. I remember back in the late 1990s when the average investor was overweight technology and the bubble burst. This time it was oil. It’s time to reevaluate and cut losses if you need too. This doesn’t mean sell anything oil related. It means you should do your homework or have an Investment Advisory firm review your portfolio. As always the opinions expressed in this article are that of the authors and should not be considered investment advice for your unique financial situation. Fogel Capital is a nationally recognized Registered Investment Advisory firm located in Stuart, FL and New York, NY. If you would like a free portfolio review, please contact us at (772) 223-9686.