Natural gas futures rose on Thursday in anticipation of high demand for heating that comes with a colder-than-normal forecast in the Midwest. Just this Monday, crude oil and natural gas prices had been near one-month lows amid continued concern about the future tax treatment for pass-through partnership structures like MLPs.
Though it’s a bit silly that futures are changing their course based on the day-to-day forecasts, this blip may spark interest in the energy master limited partnership (MLP) sector.
Trading volume among most of my Cash Machine-recommended holdings in this area really lightened up last week, subjecting stocks to more volatility — especially to the downside, if a large seller shows up. As of today, there’s still no mention in fiscal cliff talks of modifying the current MLP tax structure, so I view the slack volume as very much tied to weak oil and gas prices.
Within the oil and gas MLP sector, there’s no hesitation to expand operations, so I see strong growth potential for next year. On Dec. 11, BreitBurn Energy Partners (NASDAQ:BBEP) announced the acquisition of oil and natural gas properties in the Permian Basin in Texas with an estimated reserve life index of over 18 years. This is its third property acquisition in just two months.
With plenty of future growth on deck for the company, it’s not too surprising that brokerage firm Oppenheimer recently reiterated its outperform rating on the shares, saying it “believes that BBEP offers compelling value based on the current yield of over 10%, plus a coverage ratio that supports further distribution increases in 2012.”
BreitBurn Energy deploys an extensive hedging strategy to mitigate risks and optimize periods of peak pricing for oil and gas. Given the bullish outlook by management and the large increase in capital spending, I expect further hikes in the quarterly distribution to follow in the next several quarters.
Cheniere Energy Partners (NYSE:CQP) is another natural gas MLP that’s putting its best foot forward into 2013. This Monday, the company announced that its subsidiary, Sabine Pass Liquefaction entered into a liquefied natural gas (LNG) sale and purchase agreement with the American branch of France’s Total (NYSE:TOT), a leader in LNG production. The contract is for a term of 20 years and continues to support the very bullish long-term investment case for CQP.
Even as this “wait and see” period drags itself to the finish line, the rest of the world is making strides to a better-looking economy for 2013. The encouraging flow of economic data out of Asia is providing some welcome support for global markets, especially for multinationals that have strong exposure to the Pacific Rim.
Regardless of hoopla over the weather forecast’s effect on natural gas, I think that once our market has adjusted for the ramifications of the fiscal cliff, we should see renewed strength in the energy sector as prices rebound based on rising global demand.
Recommendation: Continue to maintain all energy-related positions.
Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing. As of this writing, he did not own a position in any of the aforementioned securities.