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<\/a><\/p>\nMuch of the decline has happened since the beginning of November.<\/p>\n
Now what we need to consider\u2026<\/p>\n
Is the MLP sector another 20% gift waiting to be unwrapped or a big lump of coal stuffed into our stockings?<\/em><\/p>\n Why MLPs Are In The Doghouse Again\u2026<\/strong><\/span><\/p>\n Now before we get all \u201cpound the table<\/em>\u201d excited about another MLP first-half-of-2020-rally coming our way we need to tap the breaks just a little bit\u2026<\/p>\n The investor pressure on MLPs isn\u2019t just annual tax loss selling\u00a0\u2013\u00a0although that is undoubtedly a part of it.\u00a0 There are also real concerns that investors have raised with this sector.<\/p>\n First Concern \u2013 Elizabeth Warren And The Far Left<\/strong><\/span><\/p>\n I don\u2019t know who will win the Presidency in 2020\u00a0\u2013\u00a0but I do think the election will be much closer than it was 2016.<\/p>\n Energy investors are rightly concerned about left-leaning candidate Elizabeth Warren.\u00a0 It is not a complete coincidence that as the rise of Elizabeth Warren happened in the polls in 2019 the selling of MLPs kicked into gear.<\/p>\n Ms. Warren is openly hostile to anything tied to hydrocarbons.\u00a0 She has blatantly stated that one of her first acts as president would be to ban fracking entirely, while also doubling down to ban all drilling on Federal lands.<\/p>\n That would unquestionably be great for oil and natural gas prices, but terrible for the volumes of the stuff that is being transported through pipelines owned by mid-stream MLPs.<\/p>\n Second Concern<\/strong>\u00a0\u2013\u00a0An Increasing View That<\/strong> There is a growing belief amongst professional investors that the energy sector has become uninvestable.\u00a0 These folks aren\u2019t reducing their energy sector exposure\u2026 they are cutting it to zero.<\/p>\n More than 1,000 different pension funds, endowments and institutions representing $8 trillion of assets have officially declared the sector off-limits. (2)<\/p>\n Those are the capital allocators who have chosen to this for the betterment of the planet\u00a0\u2013 that doesn\u2019t factor in the investment managers who have abandoned the sector for investment performance reasons.<\/p>\n Many managers think this industry has no future.<\/p>\n The feeling from many corners is that we are nearing the end of the age of oil\u00a0\u2013\u00a0that a replacement energy source is near at hand.\u00a0 If you buy that view\u00a0\u2013\u00a0the implication for midstream assets is that they will become worthless because there is nothing going through them (think of all the LNG import<\/em> terminals that were built right before shale gas hit it big).<\/p>\n In addition to professional investors seeing green (as in a new era of energy) they are also seeing red\u2026 as in the color of their portfolio if they had exposure to shale producers.<\/p>\n It is very hard for a sector to go anywhere but down if there is no interest from the people in charge of allocating hundreds of billions of institutional dollars.<\/p>\n Third Concern<\/strong>\u00a0\u2013\u00a0Getting Pipelines Approved<\/strong> Oh, the irony\u2026<\/p>\n While Canadian mid-stream companies<\/em> can\u2019t get a pipeline approved to save their lives\u00a0\u2013\u00a0their stock prices are doing great.<\/em><\/p>\n Meanwhile south of the border mid-stream companies are having great success getting pipelines approved\u00a0\u2013\u00a0in fact far too much success.\u00a0 A surplus of pipeline space is emerging.<\/p>\n Even in the Permian where production has soared there is talk of overcapacity\u2026 who would have seen that coming?\u00a0 And now investors are concerned that will lower toll rates and dividends for these US midstream MLPs.<\/p>\n Between EPIC Midstream, Plains All American (PAA:NYSE) and Phillips 66 Partners (PSXP:NYSE)<\/strong><\/span> there will be 2.5 million barrels of new pipelines moving oil from West Texas to the Gulf Coast that have been added in the second half of 2019. (3)<\/p>\n Toll rates for oil transport on these lines have come in below expectations, and this is before the impact of a mass reduction of Permian drilling hits production levels.<\/p>\n Typically rates for most Permian pipelines had been ranging from between $4 and $7 per barrel over the past year\u00a0\u2013\u00a0but (as reported by Reuters) EPIC just cut its spot rate on its new Permian pipeline to $2.50 because it was more in line with market conditions.<\/p>\n Those rate cuts directly hit cash flow for EPIC and competitors.<\/p>\n That Sound Is Music To Contrarian Ears\u2026.<\/strong><\/span><\/p>\n I have to admit, when I hear talk that includes words like \u201cuninvestable\u201d I get more than a little interested.<\/p>\n And not for a second do I buy into the idea that we are anywhere close to the point where global hydrocarbon demand is about to roll over.<\/p>\n I\u2019m excited about the money that can be made investing in renewables in the coming years\u00a0\u2013\u00a0but oil and gas will continue to power the developed world for decades.<\/p>\n As to whether it is time to buy MLP operators\u2026 unquestionably the MLP sector is about as cheap as it has ever been.<\/p>\n And of course the yields on these stocks are huge right now.\u00a0 The Alerian MLP Index (AMLP) alone is over 10% today\u00a0\u2013\u00a0in a world where finding yield is virtually impossible.<\/p>\n How often can you get a 10% yield from a diversified basket of the best operators in a given sector\u2026 there is clearly a lot of really bad news priced in here.<\/p>\n Will history repeat itself yet again in 2020 with an MLP rally?\u00a0 Or will the sector be giving investors a lump of coal.\u00a0 I\u2019ll revisit this thesis in May 2020.<\/p>\n Sources:<\/strong><\/span><\/p>\n
\nThe Energy Sector Is Uninvestable<\/strong><\/b><\/span><\/p>\n
\nin the USA Is Too Easy!<\/strong><\/b><\/span><\/p>\n<\/a><\/p>\n\n