Master limited partnerships have been among the market’s most stable and reliable groups, but 2008 was the exception, with the benchmark index down nearly 37%, the worst performance in its 13-year history but was still slightly better than the S&P 500 which was down over 38%.
MLPs have been heavily owned by institutional investors in recent years, and many were forced to sell off their portfolios piecemeal to raise cash and pay down leverage. This cash-motivated, fearful selling powered several selling waves in the Alerian MLP Index. This presents investors with a great opportunity to buy into a sector that’s been hit mainly by cash-motivated selling pressure, not a deterioration in fundamentals.
There’s a good fundamental reason for MLPs defensive characteristics, most are involved in the midstream energy business which typically has little or no real exposure to actual commodity prices. One of the most common assets owned by MLPs is oil and gas pipelines. The pipeline transportation business offers steady, dependable cash flows that don’t change based on commodity prices. This is one of the steadiest, most cash-flow-positive businesses.
Enterprise Products Partners (EPD) is one of the largest and oldest MLPs in the US . It owns pipelines, processing facilities and production platforms in the Gulf of Mexico , among other assets. Enterprise has a history of growing its distributions, raising it more then 60% of the time and has never once cut its payout.
The MLP has more than $2.2 billion in new construction projects due to be completed and go into service in 2009. These will be almost immediately accretive to Enterprise ’s cash flows, as they’re backed by long-term commitments by energy industry giants.
Yielding almost 10%, EPD is an attractive buy at today’s levels currently trading at $20. EPD has been in a trading range since December of $19.50 to 23.50.
The closing low in November was $17.26 and the most recent closing high is $23.39 in January. Today the stock held right near a 61.8% Fibonacci Retracement level at $19.60. I would use a move through the $20.30 level to enter on the long side, that was the 50% retracement level. If EPD closes below the 52 week closing low at $17.26 I would use that as a stop out.
Linn Energy (LINE) is a limited liability company, the structure is very similar to the MLP form. Unlike most MLPs, Linn isn’t involved in the midstream business but actually produces oil and natural gas. Producers obviously have exposure to commodity prices, lower oil and gas prices spell lower revenues. The catch is that Linn has hedged substantially all of its production out to 2012. This is the key to a stable distribution payout.
That means regardless of what happens to commodity prices, Linn has locked in prices above $8 per MMBtu for gas and $90 a barrel for oil. Yielding almost 17%, Linn Energy is an attractive buy at 13. LINE has been in a trading range between 11 and 17 since last October. I would buy it near 13 and stop out if it closed below the 52 week low which is at $11.20. I would set $15.50 as an intermediate term (3-6 month) upside target which is near the top of the trading range and represents were overhead resistance comes in. If that level is hit I would trail a stop at $14.50 and move it up if LINE continues higher. Even if LINE does not make a move higher you will still be taking advantage of the high yield.
Note: I do not currently own EPD or LINE
