Is that the sound of sleigh bells in the distance? After last week’s Thursday/Friday drubbing, Wall Streeters came back to work Monday with fear and trembling. But it looks as if maybe, in spite of all, the jolly old elf in the red suit really is coming to town—though with some “ashes and soot” begriming his white fur trim!
Stocks posted their second modest up session in a row on Tuesday, and the S&P 500 index finished 33 points (1.7%) above Friday’s close.
Even more encouraging: West Texas crude finally caught a bid, up 1.4% in late New York trade ($36.32 a barrel); and the battered pipeline partnerships, represented by the Alerian MLP index (AMZ), jumped 4.3%, lifting the index a stout 13.1% above its climactic December 14 intraday low.
What matters in the longer run, of course, is whether these stirrings of hope are well founded.
On Monday we got some encouraging news on that front from ONEOK Partners (OKS).
OKS issued its 2016 guidance. Working on conservative assumptions (e.g., that the price of crude oil will average between $40 and $45 a barrel next year, as indicated by the current structure of futures prices), management offered three major forecasts:
(1) The partnership will retain its investment-grade bond rating;
(2) The cash distribution will be sustained at the present level, with distributable cash flow covering the payout by more than 1.0X; and
(3) OKS won’t need to tap the public equity markets in 2016 or even well into 2017.
It’s not hard to see what could go wrong here. Oil (and natgas) prices could skid again, crimping the volume of hydrocarbons passing through ONEOK’s pipes.
Still, I find it significant that OKS — in contrast to Kinder Morgan (KMI), say — is making out a reasonable case for keeping the cash distribution intact. If OKS can hold the line, perhaps Energy Transfer Partners (ETP) and Plains All American Pipeline (PAA) will do the same.
ETP and PAA carry higher current yields than OKS: 13.7% and 12.8%, respectively, versus 11.3% for OKS. Those higher yields reflect the greater risk of a distribution cut.
On the other hand, ETP and PAA are trading at such depressed levels that a reduction — or even a temporary omission — of the cash payout probably wouldn’t have much effect on the unit price.
Over the next two or three years, as the global oil glut turns into a deficit, I project that a package consisting of OKS, ETP and PAA will double in value from here (with reinvested distributions). However, it will be anything but a smooth ride. Climb aboard only if your nerves, and your wallet, can stand the test.
Among more conservative holdings, Berkshire Hathaway (BRK.B) may be worth a look. From an operations standpoint, Warren Buffett’s baby is performing just fine. Profits will likely have reached an all-time high when the books close on 2015, and another gain seems probable in the New Year.
Yet the shares have languished in the past 12 months, off 11.3% since December 31. Chalk it up to a general malaise among stocks with an “industrial” flavor to them.
While I don’t expect Berkshire to outdistance the market indexes, over the long term, by as wide margin as it did in decades past, this tax-efficient “mutual fund of America” should continue to build formidable wealth for its owners. Buy BRK.B as an heirloom gift to yourself, or to someone you love, this Christmas.
