The price of crude oil has rebounded strongly since the end of January after closing down nearly 46% in 2014. Is this the beginning of a new upward trend? Or perhaps it’s just a short-term correction before a further decline? While it has proved difficult to predict short-term and long-term price targets on the oil and energy sector as a whole, we believe that 2014’s energy selloff has provided us with an attractive opportunity in the space. Energy master limited partnerships, or MLPs, are publicly traded corporations that combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. We believe that the energy selloff has provided an attractive entry point into this space.
WHY DID OIL PRICES DROP SO LOW? Although there were many factors that affected the price of oil in 2014, there were two key themes that played out – reduced US dependency on foreign oil and OPEC’s decision not to curb oil production. The United States has now become the world’s largest oil producer, which means we now import far less oil than we have in the past. Additionally, the Organization of the Petroleum Exporting Countries (OPEC) failed to reach an agreement this past November to curb global oil production, which continued to send crude prices tumbling.
HOW DOES THIS AFFECT MLPs? Energy prices can have a significant effect on upstream MLPs, which are typically engaged in the exploration and production of oil and natural gas. The area that has piqued our interest, however, is in the midstream MLP space which services the energy sector by providing pipelines, storage, refineries, and processing plants to the exploration and production companies.
WHAT’S YOUR OUTLOOK IN THIS SPACE? As a whole, MLPs took a tremendous hit in October and November, falling as much as 20% from their highs. As such, we believe that this presents a buying opportunity in the midstream space, particularly for income-oriented investors. Many midstream MLPs service the energy sector with long-term contracts, meaning that they have agreed to provide their services for a specific fee. Because that fee structure remains in place, their profits aren’t dependent on high oil prices.