MW: Oil and gas pipeline partnerships still look like bargains
Back in April, I listed six pipeline limited partnerships that looked like bargains for investors seeking growth and income, saying the group was being unfairly hammered by the fall in oil prices.
The idea was that the pipeline operators would still perform well, earnings wise, because so much of their business hinges upon the volume of natural gas and oil they transport and store, and not commodity prices.
Energy partnerships pass through most of their earnings to the limited partners, who are also called united holders. So we’re using the word “unit” in place of “share,” and “distribution” instead of dividend. There is a major tax advantage, because a partnership reports the unit holder’s portion of capital expenditures, which means the investor may wind up paying no income taxes at all during a given year, despite receiving significant income. The taxes really are deferred, because the effect is to lower the investor’s cost basis.
The original list was based on closing figures on April 20.
Despite strong price action last week as West Texas Intermediate crude oil CLV5, -2.70% for October delivery rose 12%, one might say I was a bit early with the April 20 list.
Five out of six of these stocks have taken quite a beating since then. The list is sorted by distribution yield and the total returns assume dividends have been reinvested:
while it’s not a fair comparison, because limited partnerships are not included in the index, the S&P 500 Energy sector declined 20% from April 20 through Friday.
Souring on the space
The worst performer since April 20 has been Plains All American Pipeline LP PAA, +1.55% which on Aug. 5 reduced its 2015 distribution growth target to 6% from 7%. CEO Greg Armstrong said he wanted to “inject caution and manage near-term expectations given the combination of our cautious near-term industry outlook and recent events that have impacted our operating performance at the margin.”
PAA expects third-quarter profit in its supply & logistics segment to decline by 7% from the second quarter to 76 cents per barrel, because of tighter margins, “particularly in areas where new pipeline capacity is debottlenecking previously constrained production areas.”
“The real issue for [Plains All American] was that capital market access hasn’t been reduced, meaning lots of unnecessary projects are being done, leaving them pessimistic on the near-term outlook for the space,” said Bill McMahon, chief investment officer at ThomasPartners, who named five of the LPs on the list back in April.
During a phone interview, he added that “the decline in oil prices can also dry up activity, hurting pipeline volumes.”
This increase in capacity and competition has caused McMahon to sour on the space, with more of a neutral attitude than he had when we spoke in April. “It’s not necessarily a big change,” he added, since ThomasPartners has been “reducing MLP exposure since 2013.”
