Markman: Expect a Bounceback in Limited Partnerships

Changing the tax structure would bring too many negatives

     

Master limited partnerships have been shellacked over most of the past week in tandem with the decline in crude oil prices, though they are well off their lows.

A key problem has been news that the White House and Congressional leaders are thinking about changing the way certain partnerships, including MLPs, are taxed, as part of an effort to raise more revenue for the government . I don’t think this is likely to make much progress, and that the decline was likely to be seen as a good entry point for investors seeking high yields.

I have been a big advocate of owning these for the past two years as they provide an ideal mix of high and rising dividend yields, strong balance sheets and rising stock prices. And now the case for MLPs is as strong as ever.

To learn more about what’s going on, let’s turn to the energy analysts at Citigroup, who weighed in on this subject last week. I agree with their view.  Here is an excerpt from their analysis:

”Since the end of last week MLPs have underperformed the broader market by 500 basis points. For an explanation some investors have pointed to a tax reform proposal that could impact pass-through entities such as MLPs. Alternatively, we do not think this is the primary driving factor behind recent weakness. In our opinion, a broad sweeping corporate tax bill that would threaten pass-through entities does not have a very good chance of making it through the existing House of Representatives with a Republican majority and getting passed into law by the current Administration. Therefore, a market reaction that has been as broad and sustained as what has occurred over the last week is most likely related to the overall sell-off and weakness in the energy sector….

“Taking this into consideration we see the recent weakness in the sector as an enhanced opportunity to buy MLPs with strong underlying fundamentals and multiple years of growth opportunities at more attractive valuations. We have a positive view of owners/operators of midstream assets with a particular focus on natural gas liquid (NGL) assets and liquid rich resource basins.

“It is common for the MLP unit prices to be volatile following distribution payments and equity issuances especially if compounded by broader market weakness. During 2010 MLP unit prices were weakest during February, April/May, and August — all following a series of equity issuances or distribution payments. Toward the end of April most MLPs have gone ex-dividend, which we believe has been compounded by weakness throughout the energy sector. 

 
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