Who knows what oil and natural gas will cost in June and how that might reflect on the recently unloved midstream services providers? The volatility in energy prices and energy investments now looms as a major risk in its own right, one many MLP investors hadn’t counted on.

On the other hand, it’s a pretty good bet that slightly more people than ever before will visit Cedar Fair Entertainment (NYSE: FUN) parks next summer. Cedar Fair operates 11 big regional amusement parks alongside three water parks and five hotels.


Source: Cedar Fair presentation

Those people (90% of them repeat visitors) will spend a little more than the prior year once again, and maybe even a little more than they otherwise would have from their savings on gasoline. They’ll stand in line for the new Fury325, temporarily the world’s tallest roller coaster, in Charlotte, and the similarly monstrous winged Gatekeeper in Sandusky. And after spending not quite $50 per head on the food and the souvenirs on top of a similar admission price they’ll leave satisfied enough to come back next year, if not sooner.

This is a business that doesn’t do well in recessions, and the last one in 2008-09 left this unorthodox master limited partnership deep in debt, shorn of its distribution and on the brink of a steal of a private equity buyout at $11.50 a share, before cooler heads prevailed. But amusement parks are money in the bank during periods of low unemployment, low energy prices and improved consumer confidence. With the economy picking up, Cedar Fair’s nearly 6% current yield offers a welcome bit of diversification for investors feeling overexposed to energy.

The shareholder revolt in the wake of that failed buyout five years ago installed the current CEO, a well-regarded Disney veteran who used to run Disneyland. Crippling debt has been paid down to a manageable 3.7x EBITDA and refinanced at a lower interest rate, leaving more for sprucing up attractions, hotels and the distribution.

The payout, which totaled 55 cents in the first year after it was reinstated in late 2010, has since risen to the current record annual rate of $3 per unit. The unit price has doubled in three years. But now the yield serves as the main attraction, consuming as it does more than 90% of Cedar Fair’s free cash flow.

The partnership continues to spend on improvements such as the Fury, renovations of the hotel at Cedar Point, closed-circuit TVs and upgraded software. But third-quarter EBITDA was flat year-over-year, held back by cool weather and rising costs. The more recent distribution increase totaled 7%, down from 12% a year earlier.

Higher labor costs as  a result of lower unemployment and minimum wage hikes around the country is an obvious headwind. But Cedar Fair has proven its ability to pass costs on in the capacity constrained amusement parks industry.  

The coming season should go better than the last, provided the weather proves a bit more cooperative. Higher prices are a certainty and record attendance a strong likelihood. Cedar Fair’s distribution depends on the health of consumer spending, which is more robust than energy fundamentals at the moment.

Unless and until consumers are running scared once again, Cedar Fair is a boring, relatively stable and perfectly decent yield worth riding. We’re adding FUN to the Aggressive Portfolio with a buy limit of $58.

A Leveraged Bet on an MLP Rally

Our other pick this month is a leveraged bet on improvement in the midstream sector’s fortunes. The Alerian MLP index has just suffered its worst three-month stretch since late 2008, dropping more than 12% during the fourth quarter. In December alone it lost 5.6%. Investors are worried about the long-term effect of low commodity prices on MLP cash flow and growth plans.

But after a year in which MLPs underperformed the S&P 500 and badly trailed real estate investment trusts and utilities, MLPs now yield roughly 50% more than REITs. Most midstream providers are well insulated from near-term fluctuations in energy prices and can certainly ride out a slump lasting a year or two. With reliable investment income as scarce as ever I expect sentiment to gradually improve, helped perhaps by calming commentary on the upcoming conference calls.

Which is to say that we may finally have an MLP dip worth buying, and that the ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN (NYSE: MLPL) would be a prime beneficiary of a near-term rebound.

The exchange-traded note mimicks twice the monthly return of the Alerian MLP Infrastructure index, stuffed with all the largest midstream MLPs.

The leverage is a risk, of course, but the note’s use of monthly rather than daily return tracking minimizes the drain of daily whipsaws on long-term performance. If MLPs follow up their weakest stretch in six years with several monthly gains in a row, as seems quite possible, the MLPL will benefit disproportionately. 


The leverage also magnifies the yield, with MLPL currently offering an annualized 12.2% based on its most recent quarterly distribution. The expense ratio is a standard 0.85%. As with other ETNs, holders assume the risk that the issuer, in this case the Swiss bank UBS, fails to pay off as promised. This remains unlikely.

The annualized yield, whether an unleveraged 5.8% in the aggregate from index constituents such as Enterprise Products Partners (NYSE: EPD) and Energy Transfer Partners (NYSE: ETP) or leveraged well into the double digits by the MLPL, should provide a favorable tailwind for the sector.

Note, though, the ETN payouts will be taxed as ordinary income and are not tax-deferred like distributions from MLP units held directly.

And, of course, MLPL would suffer disproportionately if MLPs have more bad months (and especially if they have more of them in a row.)

Some respected investment professionals like Richard Bernstein, a former Merrill Lynch strategist who anticipated both the dot-com bust and the 2008-9 bear market, have grown wary of MLPs and warn that they’re likely to continue underperforming because of the association with the slumping oil patch.

We disagree. Prices have dropped far in excess of any immediate effect of lower energy prices on midstream cash flows, and the protection provided by long-term, fixed-fee contracts will help MLPs wait out the slump. For the vast majority of partnerships, the distributions are not at risk and won’t be for years. We’re adding MLPL to the Aggressive Portfolio below $58.