Near-term declines in US oil production present a challenge for master limited partnerships that gather, transport and market these hydrocarbons. These trends create volumetric risk, especially for partnerships serving marginal producers and out-of-favor basins. Reduced demand for takeaway capacity will also limit growth opportunities.
That being said, we remain bullish on US oil output over a longer time frame, as we expect reductions in non-OPEC drilling activity and reduced capital expenditures in international markets to create an opportunity for short-cycle shale plays to fill the gap and win market share.
However, the near term will likely favor MLPs that focus on transporting natural gas from regions of growing supply to areas where consumption continues to increase.
Although North American natural-gas prices have plummeted over the past year, an extended period of depressed prices has helped to stimulate demand growth.
The Environmental Protection Agency’s (EPA) final rules on carbon dioxide emissions from power plants favors the retirement of coal-fired capacity and growing demand for baseload generation from gas-burning plants. America’s abundance of inexpensive natural gas—not advances in renewable energy—made this scenario possible.
The demand outlook for inexpensive US natural gas also looks rosy south of the border. Mexico’s domestic natural gas production has flattened and looks set to decline, forcing the country to rely on imports to meet growing demand. The country’s state-owned power company also plans to more than double its generation capacity over the next 14 years, with gas-fired power plants accounting for the bulk of these capacity additions.
The start-up of US facilities to export liquefied natural gas (LNG) over the next several years will create another demand outlet, though the sharp downdraft in gas prices in Asia and Europe raises questions about throughput volumes over the next several years.
But there’s more pain coming for MLPs in the near term, creating a real buying opportunity for investors with a longer time horizon. Keep your powder dry and your head level.
To help you out, we’ve created a list of Dream Buy Prices for our favorite MLPs in an effort to take advantage of any panic that might ensue if our forecast pans out and oil prices suffer another leg down.
You can set a buy-limit order on these stocks at our dream prices to take advantage of any further volatility in the market.
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Jan. 29, 2021
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