The oil market has been battered since the collapse of oil prices in 2015. We published articles in the month’s prior warning readers of the oncoming downturn in the oil market. However, we are now beginning to see opportunities in the heavily discounted sector, specifically in master limited partnerships, or MLP’s. Before we discuss how MLPs are different from other energy stocks and the opportunities they present in the current environment, I’d like to define what a master limited partnership actually is.
An MLP is a tax advantaged form of a publicly traded limited partnership, meaning they don’t pay corporate tax, but in return, they must pay out most of their earnings to shareholders in the form of dividends. For this reason, MLP’s are known for their large distributions to shareholders, with some actually continuing to increase their dividend throughout the oil market downturn over the last few years. Currently, the major MLP’s in the sector offer yields ranging from 6%-10%. In the low yield environment we currently face today, 10% yields certainly deserves some attention.
The MLP’s that we are focusing on are unlike other energy stocks because their business is fixated around the processing, transportation, and storing, of oil and other energy commodities. Therefore, their revenue relies heavily on production volume, rather than solely on the price of oil and gas. MLP’s as a group took a hit along with the rest of the energy sector when oil prices collapsed, however there are a handful of quality companies that positioned themselves well to benefit as the sector looks to rebound. Some of the characteristics that the high quality MLP’s possess are an emphasis on strengthening their balance sheets by reducing debt, shifting to self-funding capital expenditure, stabilizing their cash flow stream, and improving the ratio of cash flow in excess of the dividends they pay out. As production continues to grow and the stance on future oil prices begins to turn bullish, which incentives more production, master limited partnerships is an area that we view as a potential investment opportunity going forward.
Although master limited partnerships have been traditionally viewed as income investments, the downturn of the energy sector since 2015 has positioned the quality MLP’s for some significant growth as well. We see that some companies have made strides in strengthening their balance sheets, reducing leverage, increasing and stabilizing their cash flow, all while increasing their dividends throughout a sector collapse. We do see an opportunity for investors to capture above average yield with MLP’s, however like any other investment; it’s dependent on the individual’s portfolio and financial goals. If would like to hear more about the opportunities we see in master limited partnerships or the market in general, contact me at Michael@fogelcapital.com or call 772-223-9686.
Disclaimer: The information in this article constitutes the opinion of Fogel Capital Management, Inc. and is intended to be educational in nature. This material should not be regarded as investment advice or a recommendation to purchase any specific security