Do MLPs Offer a Safe way to Invest In Energy?
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Master limited partnerships offer strong yields and a relatively stable way to invest in the oil and gas sector. They provide pipelines and processing services which are less vulnerable to price fluctuations in the underlying commodities. By not holding land and reserves on their balance sheets they are not forced to take large write downs when the price of natural gas enters a bear market. In the midst of negative real rates on shorter term treasuries investors ought to examine all of the possible ways they can build a strong income portfolio.
A functioning economy needs energy to for heating and cooling, transportation, and electricity generation. Due to the current glut in natural gas prices, power companies have greatly increased their use of natural gas. They have reduced their use of coal where possible. Natural gas is much cleaner than coal. With the nuclear disaster in Japan in 2011 the support of nuclear power plants has decreased. Other environmentally friendly alternatives like wind and solar have yet to prove themselves as significant power sources leaving natural as a strong environmentally friendly energy source. For environmental reasons there's pressure to change America's energy portfolio to place a greater emphasis on natural gas. Natural gas has potential uses for transportation. Although natural gas powered vehicles are not that popular in the United States there are a number of companies which offer conversion kits. If the price of gasoline where to significantly increase then there would be a major increase in demand for natural gas as a transportation fuel. If the United States decides to reduce their reliance on foreign energy for transportation needs, then the demand for it will increase.
There are significant differences in performance among different MLPs. Energy Transfer Partners LP (NYSE: ETP) offers traditional natural gas transportation and storage services. In 2011 AmeriGas bought the propane assets from ETP thus allowing them to focus on natural gas related products. Interstate transportation and storage provides the majority of EBITDA while midstream and NGL transportation and services make up about 25% of EBITDA in the first quarter of 2012. During the 2008 recession this company maintained their dividend while other MLPs reduced or completely cut dividends. Atlas Pipeline Partners, L.P. (NYSE: APL) is another MLP which has been in existence for over a decade. They recently reinstated their dividend. Currently their dividend rate is down 20% relative to 5 years ago. Additionally from 2007 to 2011 the partnership also suffered from operating losses. This MPL is best ignored due to their poor ability to consistently show an operating profit.
Out of these MLP's the Cheaspeke Energy spin off, Access Midstream Partners LP (NYSE: ACMP) maintains the lowest debt to equity ratio but its income and profit margin have been somewhat volatile. Over the past 5 years El Paso Pipeline Partners, L.P. (NYSE: EPB) has steadily increased revenue while maintaining a debt to equity ratio close to 50%. The stock price seen positive gains since the 2008 recession though it has been flat since 2011. Though the capital gains may not be enormous, the dividends and steady stock price make for a steady return. Markwest Energy Partners LP (NYSE: MWE) has had an increasing share price over the past couple years but income as varied heavily year to year. As stated in their second quarter 10-Q statement the discrepancy in price between crude oil and NLG prices has caused the firm to take additional losses. The ability of their hedging portfolio to track the price of LNG decreased and thus exposed them to greater losses. With the historic volatility in earnings and potential future hedging problems I would be leery of buying this stock even though it has posted gains over the past couple years.
Although MLPs are somewhat shielded from the short term fluctuations in natural gas they are not completely impenetrable. As the price of natural gas stays depressed over an extended period of time, drilling and extraction will decrease. If the market cannot absorb all of the cheap shale gas then MLPs could face further difficulties. With lower natural gas volume the demand for MLPs' transportation and refinement services will decrease. Income investors ought to recognize that MLPs are not risk free, but they do offer a respectable way to support North America's energy infrastructure and make a steady yield. Over the long run the demand for natural gas transportation and refinement appears to be steady. The stronger MLPs offer geographically diversified assets and a more diversified product base. These MLPs offer yields at a respectable rate and income investors should not disregard them just because natural gas is in a temporary glut.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend El Paso Pipeline Partners LP. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
