Even with higher interest rates likely, a Wells Fargo analyst is bullish on shares of ‘quality’ names.
Source: Will Energy MLPs Remain Stuck in Down Market?
Many if not all of my clients and prospects have been attracted to this asset class in recent years. Why not? The tax advantaged income is high, the prospects of growth in America’s newly minted energy renaissance have been good, and they have been consistent good performers until last summer when the price of oil collapsed. Therefore I wanted to share some observations on this asset class.
- Not all MLPs are created equally. In the short term ETFs and general market currents distort individual stock prices. Some energy MLP’s are far more exposed to commodity prices than others. Those that are fee based may not deserve the drubbing they have taken. For example, natural gas distribution, storage, and LNG related businesses are in a growth market right now in spite of lower crude prices. Utilitiies are switching over to natural gas from coal. There are no material imports of natural gas from OPEC as gas is too bulky to ship and the US is also a very low cost producer. Starting this year and growing rapidly the US will starting exporting LNG (liquefied natural gas). Kinder Morgan, the country’s largest pipeline company, in its latest quarterly earning conference call said their natural gas pipeline business ” continues to see strong demand for existing and expansion capacity in our gas assets.”
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MLPs in general are down because interest rates are expected to rise. This hand is way overplayed. The Fed wants to get off of the zero interest rate policy as a matter of getting back to normalcy. Remember the Fed doesn’t set long term rates, only short term. The global economy is a factor in our long term rates and likely as a consequence interest rates will stay lower and longer to slowing growth in China and turmoil with the Euro. All energy MLPs have extremely favorable yields right now and will NOT in the long run be negatively impacted by a slight rise in rates.
- There is a looming glut of capacity in the midstream asset gathering and distribution business. This argument I believe may have good merits. Low interest rates have created a surge in financing for all kinds of ventures. Combined with the shale oil and gas renaissance in the US and the sudden and unexpected collapse in commodity prices, its hard to imagine how the midstream MLP business could be immune from this. This may not be as scary as it sounds though as most of these companies do not build infrastructure without long term signed committments. Certainly its possible that the E&P companies signing those commitments could go bankrupt but that might take years to play out. During the interim, its hard to predict what can happen to commodity prices as they could also rise as a result of the 40% reduction in drilling rigs this year.
- Dividend growth rates are unrealistic. This is very possible and maybe probable but Kinder Morgan’s 5% dividend yield is plenty high enough to support the stock price with zero growth. If they are able to continue to grow the dividend at the 10% rate they forecast, the stock is a screaming buy at Friday’s close of $36.89.