Master limited partnerships (MLP) and exploration and production companies have been among the biggest winners in the sharp rally that has occurred since oil prices bottomed on Feb. 12, with the Alerian MLP Index gaining 35 percent and the Bloomberg North American Exploration & Production Index surging almost 55 percent.
The Bloomberg North American Independent Refining & Marketing Index has also underperformed significantly this year, validating our lack of exposure to this corner of the energy market.
In the MLP universe, the most downtrodden midstream names have outperformed; since oil prices bottomed on Feb. 12, the Yorkville High-Income Infrastructure Index has returned almost 60 percent, while the Alerian MLP Index has gained about 44 percent.
This sharp snapback has narrowed our losses on some of the names in our MLP Portfolio’s aggressive sleeve, though hindsight reminds us that we should have been more proactive about adding positions when valuations reached ludicrously low levels.
Nevertheless, investors who bought our favorite MLPs at dream prices should sit on solid gains. After the recent rally in midstream equities and bonds, investors should continue to focus on high-quality MLPs with superior costs of capital and exposure to low-cost basins that should take market share over the long haul.
Investors who fear that they’ve missed out on the opportunity to buy these MLPs should keep their eyes peeled for the inevitable dips to add to their positions.
Overall equity issued by energy-focused master limited partnerships (MLP) declined by 58 percent last year; we expect this trend to continue in 2016.
Our near-term outlook for crude-oil and natural-gas prices hasn't changed, though investors should consider taking profits on demand-oriented names that tend to thrive when oil prices dive.
The severe downdraft in the prices of crude oil, natural gas and natural gas liquids has pressured producers’ cash flow and outpaced reductions to service costs and capital expenditures. Accordingly, the cash flow shortfalls that predominated in the salad years have continued in the lean years, setting the stage for further spending cuts in 2016.
Data from the Commodity Futures Trading Commission indicates that hedge funds and other institutional investors have shorted the equivalent of 160 million barrels of West Texas Intermediate via futures contracts.
After plunging almost 50 percent from early May 2015 to mid-February 2016, the Alerian MLP Index has defied the critics and torched slow-to-react short sellers by surging 45 percent since its nadir. But the easy money has been made: Investors must now focus on which names are best-positioned to grow in an environment where energy prices remain lower for longer.
Activity levels and pricing for oil-field services and equipment will likely remain under pressure in the US onshore market this year, with early 2017 bringing a bit of a recovery on both scores. But a return to the levels witnessed during the boom years appears unlikely, especially if Saudi Arabia opts to tap some of its spare capacity to take market share and keep oil prices in check.
Too many pundits talk about a potential recovery in oil prices without considering the drivers and implications.
The utility sector's implosion in 2002 and 2003 has some important lessons for MLP investors.
The financial infotainment industry has hyped the diplomatic tension between Iran and Saudi Arabia as a geopolitical risk that will support crude-oil prices. There's a reason Monday's pop in crude-oil prices was so short-lived: this narrative just isn't true.
Elliott and Roger on May. 24, 2016
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