MLPs continue to be weak. Through yesterday the Alerian Index is -15.1% YTD and has now fallen 26.6% from the peak last August. This trend has accelerated in recent weeks. Since we are only now heading into earnings season for many names, the moves of late have been driven largely by macro issues. The drop in oil is the obvious culprit, but fear of rising rates and volatility in Chinese stocks are also playing a part in investor psychology. The Energy Sector broadly is also weak, with the Energy SPDR ETF (XLE) down -8.4% YTD.
Fundamentals for MLPs, and the actions of the people who run them, are mostly at odds with market moves. Kinder Morgan (KMI) reported quarterly earnings as I noted on my blog last week (Kinder Morgan Isn’t Greek) and the earnings call wasn’t substantially different from one or two quarters previously. The company continues to be on track for a $2 dividend this year (which gives it a current yield of 5.58%), continues to guide for 10% annual dividend growth through 2020 and has a $22BN backlog of projects. M&A activity such as Energy Transfer Equity’s (ETE) bid for Williams Companies (WMB) and Marathon’s acquisition of MarkWest (MWE) reflect the conclusion of industry insiders that the outlook justifies substantial commitments of capital at current valuations. Furthermore, insiders such as ETE’s CEO Kelcy Warren and KMI’s Chairman Rich Kinder recently made further personal investments in their stock.
The Alerian Index yields over 6.5% and even 4-5% annual distribution growth would provide a 10-11% overall return, something with which few if any other public asset classes can compete. Moreover, the focus on MLP GPs that we have holds out the potential for substantially faster growth.
Consequently, although the Alerian Index is -15.1% this year as noted, investing in MLP General Partners has provided substantial downside protection since our MLP SMA Strategy is down around -5.5% through yesterday for 2015 (past performance is not indicative of future returns). I’ve been invested personally in MLPs for many years, and even if I had correctly forecast the 26% drop we’ve seen since last August and acted on it by liquidating my entire MLP portfolio so as to reinvest at today’s prices, such a move would even now have been unprofitable. This is because I would have realized substantial gains earned over many years, thereby incurring a large tax bill. In addition, our holdings have fallen far less than the Alerian Index as noted.
We use no leverage, and midstream infrastructure businesses such as the investments we hold have strong balance sheets. Prices will fluctuate, but there is a very low probability of any permanent loss of capital. Although I don’t personally recommend investing by looking at charts, visually the recent selling has gathered momentum and I’d suggest that recent sellers following almost a year of weakening prices are unlikely to include the most astute investors. We believe valuations are attractive and that long term investors should consider committing funds as appropriate to their individual situation.
I write a weekly blog as well as a monthly newsletter, so our current views are never far away. If you have any additional questions feel free to contact me.
We are invested in KMI, MWE, ETE, WMB.
We also run a mutual fund, and you can learn more about it here.
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