MLPs and Energy Play Opposites

By Ari Charney • October 20, 2017 • Updates

Prior to the energy crash, the conventional wisdom about pipeline companies is that they only had indirect exposure to commodity prices. While that’s technically true, if your biggest customers are all energy producers eventually you’ll feel the pain too.

As such, investors in master limited partnerships (MLPs) have since become accustomed to checking the prices of benchmark energy commodities each day to see what the market might have in store for their holdings.

But while the movement of the Alerian MLP Index over the past year appears to loosely correlate with the price of West Texas Intermediate crude oil, that relationship appears to have come undone over the past month.

Earlier this month, MLPs rallied as energy prices swooned only to then swoon as energy prices rallied.

What gives?

There are a few factors that may be in play.

Earlier this week, Goldman Sachs lowered its ratings on a handful of key midstream players, including Energy Transfer Partners LP (NYSE: ETP), Kinder Morgan Inc. (NYSE: KMI), Spectra Energy Partners LP (NYSE: SEP), and Targa Resources Corp. (NYSE: TRGP), so that may have driven the decline, especially in the wake of KMI reporting earnings.

Kinder is usually the first midstream company to release earnings each quarter, and its results can color market sentiment for its peers.

Although KMI beat estimates across most performance metrics, not everything was rosy. Management noted a key project, the Trans Mountain pipeline in Canada, could be delayed by nine months. That could underscore concerns about project execution and rampant NIMBYism for other pipeline companies.

Beyond that, some of the biggest MLPs saw their operations disrupted by three major hurricanes over the past six weeks. While things could have been worse, temporary shutdowns will likely weigh on third-quarter results. Investors could be lightening up on certain positions in anticipation of this outcome.

How each MLP reacts following its earnings release probably depends on the extent to which analysts lowered their estimates to account for these disruptions. A lower hurdle would obviously make for an easier beat.

Lastly, the yield on benchmark 10-year U.S. Treasuries has jumped sharply higher this month, as the prospect for tax reform and a new Federal Reserve chair come into focus. While most MLPs yield enough to stave off any near- to medium-term competition from Treasuries, they are still sensitive to fluctuations in interest rates.

Although this kind of action is unnerving, we don’t see any reason why the recent decline in MLPs should be more than a short-term slide.

In other news, The Blackstone Group LP (NYSE: BX) saw its units surge after third-quarter results blew past Wall Street’s expectations.

The private-equity powerhouse attracted nearly $20 billion of capital inflows during the quarter, pushing assets under management up 7% year over year, to a record $387 billion.

Distributable earnings grew 5% year over year, to $0.52 per unit. Based on that number, the board approved a distribution of $0.44 per unit.

Blackstone pays a variable distribution that targets 85% of distributable earnings, so its payout fluctuates every quarter depending on its financial performance. As such, while Blackstone’s units generally offer an attractive yield, you shouldn’t count on this security to deliver a consistent level of income each quarter.

The main driver of Blackstone’s performance this quarter was its $111 billion real estate segment, thanks to $3.1 billion of sales of seasoned assets, including most of its remaining stake in Hilton. As management noted, Blackstone’s original $6.5 billion investment in the hotel chain has now produced about $14 billion of profit, including $1.2 billion of unrealized gains.

Looking ahead, Blackstone continues to raise money for what it hopes will be the largest-ever infrastructure fund. The asset manager already has $20 billion lined up courtesy of Saudi Arabia and is looking to pull in another $10 billion before it starts deploying capital.

Blackstone plans to invest 70% of the fund’s assets in North America in areas such as energy, transportation, communications, water, and waste facilities.

Blackstone’s units have had an incredible run over the past year, but they remain reasonably priced compared to both its peers and the broad market.

Stock Talk

Comments Guidelines
Robert 111

Robert 111

Ari,
This is the first I can recall seeing your name and now you are listed as the Chief Investment Strategist.
Is Igor taking a secondary role in Income Millionaire? Would it be possible to receive a trial of your Utility Forecaster along side this one. After the first of the year I have to make a decision as to whether to renew this service. Some of the advice has been vague and clarifications have been slow in coming. Perhaps your other letter would be better suited to the income stocks part of my portfolio.

Robert 111

Robert 111

Actually the Mind Over Markets letter would be of more interest to me.

Ari Charney

Ari Charney

Hi Robert,

In addition to running Utility Forecaster, I’ve previously helped run Canadian Edge and MLP Profits, two of the three newsletters that were merged into this one. So in a sense, this is a homecoming.

I believe Utility Forecaster is available with the standard 90-day trial period, where if you decide it isn’t right for you during that period you can cancel and get a full refund. So if you’re interested in checking it out, please give customer service a call and they’ll help set everything up:

(800) 832-2330

Or you can subscribe online here:
https://www.investingdaily.com/utility-forecaster

Mind Over Markets is affiliated with Personal Finance, which is our flagship newsletter. So if you want the paid advice associated with Mind Over Markets, then you should try a subscription to Personal Finance:
https://www.investingdaily.com/personal-finance

Best regards,
Ari

Edward Getchell

Edward Getchell

I hold a number of Canadian stocks that I no longer can find in any of Investing daily portfolios.
Power Corp of Canada
Northwest Healthcare
Inter Pipeline
Fortis Inc.
Enercare Inc.
Altagas Ltd
Brookfield Inferstructure partners
These seem to have disappeared along with the people in Investing Daily that promoted them in the first place. At least I can’t find them. Are these gone for good from your advisory service?

Ed Getchell, Wealth Society member

Ari Charney

Ari Charney

Hi Ed,

These stocks were all former holdings of Canadian Edge. When we ceased publishing that newsletter in May, we offered an update with parting advance for each of the portfolio holdings and left the site up for three months in case subscribers had any questions or wanted to review past advice.

Here was my parting take for each of the holdings that you listed above:

The following stocks I considered Core Holdings suitable for long-term investors:

Brookfield Infrastructure Partners LP (TSX: BIP-U, NYSE: BIP) is an incredibly shrewd investor that knows how to take advantage of market dislocations around the world.

Brookfield’s globally diversified portfolio consists of high-quality regulated and contracted assets across the utilities, transportation, energy, and communications sectors. The stable cash flows generated by these assets support the partnership’s targeted long-term distribution growth trajectory of 5% to 9% annually.

Fortis Inc. (TSX: FTS, NYSE: FTS) is the largest investor-owned utility in Canada, but it generates a majority of its operating income from its regulated utility operations in the U.S.

With last year’s acquisition of the U.S. transmission company ITC Holdings Corp., Fortis now owns one of the most valuable pieces of 21st century U.S. utility infrastructure. Earnings per share are forecast to grow 5% annually over the next five years, which should drive dividend growth of 6% annually over the same period.

Compared to TransCanada, Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF) is more conservatively levered and its shares have a higher yield.

The midstream player also has good timing: It completed a major expansion just prior to the energy crash, which means it didn’t have to scramble for funding like so many of its peers. However, with capital spending reverting to lower levels, there aren’t any big near-term catalysts for earnings and dividend growth, which are expected to be muted compared to its peers.

Management is considering investing $3.1 billion in a petrochemicals complex, which could be a shrewd move given that industry’s resurgence. But this also entails considerable execution risk and greater exposure to commodities prices.

NorthWest is in the Income Millionaire Portfolio, but here’s what I had to say about it at the time:

NorthWest Healthcare Properties REIT (TSX: NWH-U, OTC: NWHUF) may still be technically in turnaround mode following its 2015 consolidation, but growth in funds from operations per unit looks to average a steady 5% annually over the next two years. That should comfortably support the REIT’s monthly distribution, which yields an attractive 7.6%.

Meanwhile, NorthWest is further diversifying its holdings globally in an industry that enjoys a strong secular tailwind from the world’s aging population. Our main concern is leverage, which is high even for a REIT, though the balance sheet is improving. This is among the riskier of our core holdings, but given its high yield, we think the risks and rewards are well balanced.

I put the following stock in the moderate-risk category:

Although Power Corporation of Canada (TSX: POW, OTC: PWCDF) has investments in a number of areas, the family-run holding company derives the vast majority of profits from its controlling stakes in the publicly listed firms Great-West Lifeco and IGM Financial.

Because of its structure, Power Corp. has traded at a persistent discount to the underlying value of its assets. However, when the next generation takes the helm, it could find a way to unlock greater shareholder value.

AltaGas and Enercare were not part of Canadian Edge’s final portfolio, so we didn’t offer any parting advice for them.

This service will continue to look for potential values in the Canadian market, which certainly has more than its fair share of high dividend payers. So at least a couple of the names you mentioned could eventually end up in the Income Millionaire Portfolio.

Best regards,
Ari

pipeline

pipeline

Ari

following up on Robert’s question
Is Igor still associated with Income Millionaire?

Ari Charney

Ari Charney

Hi,

Unfortunately, Igor decided to move on to other opportunities.

He’s an insightful analyst, a brilliant writer, and a fearless investor. And I’ll miss his fellowship.

The good news is that we’re working on enhancements to this service that will offer more ways to generate current income. We’ll have more on that in the months to come.

Best regards,
Ari

Robert 111

Robert 111

Thanks for letting us know what you are doing and plans for the future in the email this afternoon. Sounds like a good plan. I think you should post it in case some of us missed it.

Ari Charney

Ari Charney

Hi Robert,

Thank you for bearing with us. Also, any editorial content that goes out via email is always published to the website first.

Best regards,
Ari

Robert 111

Robert 111

Somewhere I read that you were planning to review the portfolio and likely were going to drop most investments that did not have at least a 4% dividend/yield. Now I can not find it.

As the portfolio changes are mad, will you let us know your top 5 choices at the time we receive the changes? I hope we don’t get a long laundry list of stocks without guidance.

Ari Charney

Ari Charney

Hi Robert,

As you noted, that comment was in last week’s update, which was sent out via email and published to the website on Friday. Since that yield threshold essentially meant halving the portfolio, I directed subscribers to view the portfolio table via the link to see which securities were being removed.

One thing I noticed in the portfolio table is that securities marked “Sell” still had a green label for some reason. So after consulting our tech guys on how to change this to a less confusing color, the “Sells” now appear grayed out instead.

Aside from that, I’m not planning a huge number of changes initially. Instead, we’ll retain the higher-yielding securities that Igor selected, though we may swap certain ones out for others as time goes on.

Yes, I would prefer to maintain a more concentrated portfolio of around 20 stocks, instead of a long laundry list of selections.

And I agree that it would be a good idea to designate our top-five picks. I will give that some thought and announce which securities merit that designation in an update at some point over the several weeks.

Best regards,
Ari

Add New Comments

You must be logged in to post to Stock Talk OR create an account