The Tumult In MLPs

If the recent violent sell-off in energy infrastructure stocks has you puzzled, you have plenty of company.That’s why Sunday’s blog is going out early, because we’ve been discussing it with so many people. We enjoy a regular dialogue with many of our investors and last week was the busiest we can recall in responding to clients.

Many wanted to understand why MLPs had followed crude oil lower earlier in the year but failed to mimic its recent recovery. It’s easy to sympathize. A bullish view on oil was almost a prerequisite to committing capital to the sector in the first half of the year. Never mind that linking MLP operating performance to oil is in most cases futile. Their stock prices and oil did move together for months until that correlation broke down most inconveniently as oil rose. Investors feel duped.

Many callers were looking for confirmation that they’re not missing something, so absent were compelling explanations. Is it tax reform? Little detail is known, but the Administration has proposed allowing owners of partnerships to pay taxes at newly reduced corporate rates rather than the higher ones on income (see MLPs and Tax Reform). And anyway, the MLPA is well practiced at lobbying against adverse tax changes.

Perhaps investors are looking ahead to declining global crude oil demand? It’s a long way off and in any case, US output looks set to exceed it previous high of 10 Million Barrels per Day next year, eclipsing a record set in 1970.

Is shale output peaking? The rig count is growing but more slowly. But looking across a broad selection of exploration and production companies, capex plans for 2018 don’t show much sign of retrenchment.

Tax loss selling was suggested by some — energy stocks offer many of the rather limited opportunities this year to sell at a tax-deductible loss. As MLP investors are painfully aware, the stock market has been registering new all-time highs seemingly every week. Hedge fund selling was certainly cited in some quarters, but there are a lot of hedge funds and they’re always buying and selling.

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We are invested in EPD and ETE

Disclosure: None.

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