Dr. Strangeguy: How I Learned To Stop Buying MLPs And Love Other Sectors

I became an MLP addict just after the turn of the century when I purchased units of Teppco. Teppco was in my estimation at the top of the master limited partnership (MLP) food chain. It had an above-average yield and was appreciating over 10 percent a year.

Then, one day I noticed where Enterprise Products Partners (NYSE:EPD) was acquiring Teppco at a nice premium. I was hooked!

I spent most of my research time learning about MLPs. I soon found out that there were several types in the energy sector – exploration & production MLPs, midstream MLPs, and downstream MLPs. I was like a kid in a toy store, and the best thing about MLPs was that few folks seemed to know about them – so most flew under the radar.

Between about 2004 and 2008, I accumulated lots of them. My distribution cup was overflowing. Then came the bear. The markets tanked – and lo and behold so did the MLPs. But a funny thing happened; most of mine retained distribution levels, and a few even continued to increase them. While fearing the worst in the bear market, I increased my holdings in a few, particularly EPD.

Over the next six to seven years, the MLP sector climbed along with the new bull market. By around 2014-2015, all was once again well in MLP land – prices had recovered and distributions were again increasing.

Then, a strange thing happened; the number of MLPs began to increase – from a relative few to around 100 or so. As the numbers increased, so did investor knowledge; everybody was talking about them and buying without much thought for fundamentals. Many sported ridiculous double-digit yields, particularly those involved in exploration & production activities.

By this time I owned about 15 or 16 of them. Then things began to deteriorate. I believe the combination of too many MLPs, way too much emphasis on exploration & production as oil and natural gas supplies began to increase, the quest for yield, and other factors all began to kick in, and the unthinkable happened – they started to decline.

From 2015 to the present, the MLP sector has underperformed just about every other sector in the markets. The exploration & production segment has suffered the most with distribution cut, companies going bottoms up. Well, if you owned them, you know what I am talking about.

One additional factor in my opinion really put the kibosh on the sector – the Take Under. As prices declined, general partners jumped at the opportunity to acquire the limited partnerships – most at bargain prices – for them. Many MLPs succumbed to the Take Under; the acquisition premiums offered were in many cases miniscule, and individual investors whom paid much higher prices when they originally bought were left high and dry.

Today, there are a lot fewer MLPs than there were five years ago. I expect to see the current number dwindle even further, particularly with the craziness in the energy futures markets we have experienced in recent days. Where formerly a distribution cut (or even failure to increase) was virtually non-existent, this quarter cuts seem to be the rule, and not the exception. In fact, it seems as if cuts ranging from 50 percent to 75 percent are prevalent. This has produced chaos among yield chasers, particularly retired folks, many of whom seem to buy without doing much if any research.

How Did I React?

For the past three or so years, it has become painfully obvious to me that the MLPs are a dying breed, particularly those involved with oil. Even the newly created C-Corps seemingly have little in the way of a positive future.

I am not trying to say that I was prescient about what was about to happen, but when I backed off and looked at what was going on with the sector, common sense kicked in. I set a goal to reduce the number of MLPs in the Protected Principal Retirement Portfolio (PPRP) to a more manageable number. To make a long story short, I reduced my holdings to six.

I presently own two predominantly gas mid stream MLPs – EPD and Energy Transfer LP (NYSE:ET); one renewable resource MLP – Enviva LP (NYSE:EVA); one logistics and marketing MLP – Delek Logistics Partners (NYSE:DKL); one providing predominantly terminalling and logistics services – USD Partners (NYSE:USDP); and one involved primarily in transportation and storage of oil and refined products – PBF Logistics (NYSE:PBFX).

Of these, EPD is supposed to be the “cream of the crop”, but EVA (wood pellet provider) has been my recent favorite. I am reasonably satisfied with all six, although the jury is still out on USDP and PBFX pending their current quarter distribution announcements. I might only own four in a few weeks – which will suit me just fine.

What Have I Learned?

It is always a good thing to learn from one’s experiences, and mine with MLPs is no different. Overall, I believe that I have done very well in the sector, particularly over the past several years. When I look at the prices today of the MLPs I have exited, I feel very blessed. I made money on most, and when I didn’t, I cut my losses before the bottoms fell out. In today’s environment of distribution cuts, four of my six have either maintained or slightly increased distributions, while I anxiously await the final two to announce. Over the years I can say that MLPs have greatly contributed to my income stream, and for that, I also feel very blessed.

So, what have I learned from all of this? This can be summarized as follows:

1. Do not chase yield.

2. Consolidate MLP holdings to a reasonable number.

3. In the future, only buy the best – and if I do, I should only add to the ones I already own.

Learn To Love Other Sectors

I have begun to research renewable resources and alternative energy stocks. Not that I believe that oil and natural gas are going to go away in my lifetime, but I believe that renewables are going to gain the interest of more investors, and I think there are opportunities to profit here.

I have no interest in electric vehicles as an alternative since today electric cars only constitute about 2.2 percent of total vehicles on the road. I wouldn’t count on makers of combustion engines going out of business anytime soon.

My interest is in hydro-power, wind, solar, cogeneration and biomass. I have identified a few potential stocks of interest and intend to produce an article about these in the near future. Here are the few I am looking into:

Brookfield Renewable Partners (NYSE:BEP) – This is currently an MLP; however, by fall there will be a new issue (BEPC) that will not be an MLP. BEP owns a portfolio of renewable power generating facilities in North America, South America and Asia.

Atlantica Yield PLC (NASDAQ:AY) – AY is UK based and owns and manages natural gas power, renewable energy, electric transmission lines and water assets in the United States, Central and South America, Europe and Africa.

Algonquin Power & Utilities Corp. (NYSE:AQN) – AQN owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in Canada and the United States. It generates and sells electrical energy through non-regulated renewable and clean energy power generation facilities. The company also owns and operates hydroelectric, wind, solar, and thermal facilities.

Conclusion

So this summarizes my experience in the world of MLPs. I’m not at all sorry I owned them – just sorry I owned so many. As a reformed addict, I can now look at news of MLPs without getting re-hooked, and I continue to try to work with other addicts to get them off the stuff.

In a more serious vein, there is more out there folks. It’s not all about chasing yield as some would have you believe. There probably is a place for a few MLPs in every portfolio, but far more care must be exercised nowadays with research than was done in the past. Stick with those least impacted by change, and if something bad happens like a distribution cut, don’t be afraid to sell and redeploy the assets elsewhere.

Disclosure: I am/we are long DKL, EPD, ET, PBFX, EVA, USDP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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