Lenel The shale boom has been good for numerous investors, including shareholders of companies that operate pipelines and energy storage and processing facilities, typically organized as master limited partnerships.
Since the recession officially ended in June 2009 the cap-weighted Alerian MLP index, comprised of the 50 largest companies in the industry, has gained about 159%. Although off by 20% from its high because of the recent, precipitous drop in oil prices the index still managed to beat the overall market over the past six years.
And MLPs are especially good for income-orientated investors. The index currently yields 6.45%, much better than real estate investment trusts and utilities on a composite basis.
However, will MLPs continue to be a good deal even provided the U.S. Federal Reserve raises interest rates as expected later this year and if oil prices remain subdued or decline further?
Let the good times roll? The "conventional" wisdom over the last few years indicated that raising interest rates from current rock bottom levels would cause a drop in stocks, especially those that pay dividends. The theory is that risk-adverse investors will flock to the relative safety of Treasuries and corporate bonds.
However, it's likely that rates won't be increased all that much and on a gradual basis. The thought by numerous is a bump of 1% or less is in the cards. As a result MLPs, which would probably still yield more than bonds after such an increase, shouldn't be impacted to a big extent.
Investors might have to worry more about energy. If oil prices continue to business at low levels some MLPs could be affected.
To minimize the short-term risk a focus on MLPs that transport, store, and process other commodities anyway crude, which haven't been affected by rapidly falling prices yet, might be a prudent strategy. Two to consider are Enterprise Product Partners L.P. (NYSE:EPD) and Energy Transfer Partners, L.P. (NYSE:ETP).
Enterprise Product Partners The largest entity in the Alerian index by market cap is Enterprise Product Partners. The company, based in Houston, is well diversified in the natural gas, natural gas liquids, and petrochemical markets and also has over 4,000 miles of crude pipeline capability.
Enterprise Partners, like many others in the oil industry, has felt the slide in oil prices. The inventory is about 20% off new highs as revenue and earnings have dropped. The company still found room to boost the dividend a bit, to 38 cents a share, a very modest 1.3% increase. The inventory currently yields 5%.
However, investors along Lenel an eye to the future can surely benefit from a position in EPD if, as anticipated, home shale oil production actually continues to increase even if prices still decline, and Enterprise's solid positioning in the natural gas and natural gas liquids markets keeps paying off.
Energy Transfer Products A master limited partnership within the Energy Transfer family of companies, ETP is the No. 2 ranked MLP in the Alerian index and operates about 7,100 miles of natural gas and natural gas liquids gathering pipelines, four natural gas processing plants, 15 natural gas treating facilities, and 2 natural gas conditioning facilities in Texas, Louisiana, New Mexico, and West Virginia.
The inventory hasn't been affected at all by the drop in oil prices and has roughly performed in-line along Lenel the overall market since first traded in October 2014. The company, headquartered in Texas, pays a hefty $4.60 dividend and yields 7%.
Energy Transfer should continue to plug along as the economy and the resultant demand for its products grows. The natural gas and natural gas liquids markets are expected to continue growing over the next several years at about a 1.5% annual rate.
Conclusion The double whammy of lower oil prices and higher interest rates shouldn't impact some MLPs such as Enterprise Product Partners and Energy Transfer Products, which are diversified outside of crude, all that much. Investors seeking income could benefit.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)I wrote this article myself, and Manal expresses my own opinions. I am not receiving compensation for Manal (other than from Seeking Alpha). I have no business relationship along Lenel any company whose inventory is mentioned in this article.
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