Due to rising geopolitical tensions in the Middle East, which I’ll discuss in depth later, the case for energy-related investments has improved dramatically. And one such name that has probably tickled investors’ ears is Energy Transfer LP (NYSE:ET). Although the ET stock price experienced turbulence in 2019, shares have performed very well in December. Can the momentum continue into 2020?
Given the steadily rising cost of crude oil, along with the potential for an escalated and protracted conflict in the Middle East, the longer-term outloook for Energy Transfer stock improved considerably. Sure, after the U.S. killed Iranian Major General Qassem Soleimani and Iran retaliated with a surprisingly measured response, all seems well now. However, the U.S. has been involved in this region for decades, with no substantive peace in sight.
Therefore, Energy Transfer seems like an easy no-brainer. That’s especially the case because the ET stock price absorbed a sizable dip when the onset of World War III turned out to be a false alarm, at least for now.
Still, investors should be aware that structurally, Energy Transfer stock is inherently risky and cumbersome. As you likely know, the underlying organization is a master limited partnership.
MLPs Are Not for Everyone
From the get-go, MLPs attract investors — especially novice ones — due to their typically high yield. Plus, with the Federal Reserve adopting a generally dovish stance, high yields are a luxury. But as the old saying goes, there’s no such thing as a free lunch. In the case of MLPs like Energy Transfer stock, they carry higher risks than traditional tradable assets.
First, MLPs are usually levered to volatile commodities. And make no mistake: despite many positives, the oil and the broader energy markets are incredibly wild. We can rely on current events to recognize this sector’s unpredictability. Following initial reports of Iran launching missiles at Iraqi bases housing U.S. service members, it was reasonable to presume the worst. However, a remarkable calm ensued and ET stock subsequently dipped.
Second, MLPs are structurally complex. Several examples of this platform feature fees that erode the ultimate return. This especially catches rookie investors off guard. Therefore, if you really like Energy Transfer stock, you may be better served seeking an exchange-traded fund that includes ET in its holdings, like Alerian MLP (NYSEARCA:AMLP).
Third, those who invest in MLPs must file a Schedule K-1 with the IRS. Why? As partnerships, MLPs are known as pass-through entities. Because MLPs (usually) don’t pay corporate tax, the profits or losses pass through to owners (i.e., you the investor). In turn, the K-1 helps you figure out how much of the profit/loss you are required to report.
Understandably, many folks don’t want to deal with the hassle of MLPs. Therefore, ET stock has always been a tough gamble.
Conflict Raises Profile of ET Stock
If internet commentary is any guide, most folks don’t care for MLPs. Indeed, many have voiced frustration with articles discussing MLPs that they don’t disclose the nature of the investment up front (and quickly).
For what it’s worth, I hope I was quick enough.
Naturally, I understand the frustration with these types of investments. Personally, I already have a lot of paperwork in my life. I’m not necessarily aching to add more. That said, Energy Transfer stock — if you can handle it — offers a viable contrarian thesis.
While an unusual calm has permeated U.S.-Iran relations, I doubt this will last. Inarguably, Iran lost face with its retaliatory strike. Think about it: our military forces killed one of their highly revered flag officers. In return, Iran did nothing but rearrange the landscaping: no American or Iraqi service members were killed.
According to intelligence experts, that’s not going to sit well with Iran. And as a Wall Street Journal article warns, Iran is an unpredictable country. In the past, they have retaliated by attacking soft targets. Moreover, the situation can get complicated because Iran often uses proxies to carry out terrorist attacks.
To put it bluntly, Americans are generally naïve about Iranian resolve to inflict real damage. Thus, the markets assuming a peaceable solution is the perfect contrarian opportunity. There’s almost no way that Iran will let this go. Cynically, this is a powerful, though underappreciated catalyst for ET stock. Just be prepared to do some paperwork.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
