8/26/2013 8:15 PM ET|
A good time to buy MLPs
A modest tapering of the Fed's stimulus could come next month and produce a temporary rally in a variety of income vehicles.
I think this is a good time to buy -- selectively -- income-producing MLPs (master limited partnerships). I'm less enthusiastic about REITs (real estate investment trusts); there are good buys in the sector, but you have to be even more selective than with MLPs.
I'm going to explain how you go about being selective in buying MLPs and REITs.
On Sept. 18, I think the Federal Reserve will begin to reduce its monthly purchases of Treasury and mortgage-backed securities. About 65% of economists surveyed by Bloomberg on Aug. 21 agree with that opinion.
The consensus is that the taper will begin with a reduction in the $85 billion in monthly purchases to something like $75 billion or $70 billion. My suspicion is that a reduction of that magnitude won't have much effect on the financial markets. In fact, my suspicion is that the reaction will be "That's what we were worried about?" and that we'll get at least a temporary rally in bonds, dividend-paying stocks and other income vehicles (with the accent on "temporary" -- remember that the markets also have to cope with the threat of a government shutdown in September over the federal budget, as well as a potential debt ceiling crisis in October).
If my suspicion is correct, right now is a good time to pick up shares of dividend-paying companies and units of MLPs and REITs. After the drubbing dealt out to income assets in the last month, it's relatively easy to find dividend stocks that pay 5.24%, as Teco Energy (TE) did at the Aug. 23 close or MLPs paying 5.72%, as Oneok Partners (OKS) did on that date.
But I'd like to have more than suspicion in my corner before buying anything in the income sector now. Yes, it stands to reason that a taper to $75 billion from $85 billion won't be a
big deal and that income assets are now oversold, but I wouldn't mind buttressing that suspicion with as many other advantages as I can find.
Fortunately, I can find two that suggest where the biggest and safest bargains in the income sector lie.
First, I'd like to see income assets for which the price has been driven downward by more than just fear of the taper. For example, part of the reason I recently added Teco Energy to my Dividend Income Portfolio is that the company's coal subsidiary has been hit hard by falling demand and lower prices, providing a second negative trend in addition to the more general fear of a Fed taper.
Second, I'm looking for stocks with a second or third negative trend playing against them if -- and only if -- I think that trend is likely to reverse soon. So I looked to buy Teco Energy because the company is planning to sell its Teco Coal unit. That sale would remove one of the problems depressing Teco Energy shares and give the stock a very good chance of rising, even if my suspicion on the market reaction to a taper turns out to be wrong or overstated.
In other words, I'm looking for income assets with their own specific reasons for appreciation rather than just trusting to a hope that a rising tide will lift all boats.
(Article continues below video)
So why buy?
I think the natural-gas boom in the United States has made for especially attractive hunting in the energy MLP sector. And within that sector, I'd target MLP pipeline companies with big exposure to natural gas liquids.
You're probably familiar with the way that the boom in natural gas from shale -- following on slack demand resulting from the global financial crisis -- has driven down the price of natural gas in the United States. Natural gas prices, which had touched $13 per million BTU (British thermal units) in June 2008, plunged to $2 per million BTU in 2012 before beginning a recovery that put September futures at $3.54 per million BTU as of Aug. 23.
With producers not making money at that level, they cut back on natural gas exploration and production and increased production of natural gas liquids, such as ethane, propane and butane, that were in demand from the chemical industry. At Chesapeake Energy (CHK), natural gas production was flat in the second quarter, but production of liquids -- oil and natural gas liquids -- climbed, making liquids 25% of production in the quarter, up from 21% in the second quarter of 2012. (Chesapeake Energy is a member of my Jubak's Picks Portfolio.)
As you might imagine, this wholesale shift in the sector has resulted in a surge in supply of natural gas liquids and a drop in price. Natural gas liquids, which sold for better than $40 a barrel in December 2012, dropped to $33 in June. That resulted in pain not just for producers, but also for pipeline companies. While some companies were relatively sheltered from the price drop because a majority of their natural-gas-liquid transmission business consisted of fixed fee contracts that don't rise or fall with the price of gas, no pipeline company totally escaped. For example, second-quarter results at Oneok Partners were hit by "ethane rejection." The price of ethane had dropped so far that it no longer paid to separate ethane from other liquids at the field, so the resulting liquids shipped through the pipelines were a less-valuable mixture of liquids rather than purer and more-valuable ethane or propane or whatever.
In the first quarter of 2013, spreads between ethane and propane basically collapsed at Oneok to just a penny a gallon. That led to a huge miss, as earnings came in at 42 cents a unit instead of the 58 cents projected by Wall Street analysts. In the second quarter, a rebound in ethane/propane spreads to 6 cents a gallon contributed to an 8-cents-a-unit earnings surprise. (Oneok is a member of my Dividend Income Portfolio.)
So how does all this bad news about natural gas liquids equate to a reason to buy specific energy MLPs?
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The supply of natural gas liquids has led to a big need for investment in pipelines, fractioning plants and export facilities for natural gas liquids. Remember, one of the things you're looking for when you evaluate an MLP is the future stream of investment opportunities. Yes, you certainly want an MLP that can raise cash at a reasonable price, but you also need to make sure that the MLP has enough places to put the cash.
That's certainly the case with energy MLPs in the natural gas liquids sector. Look at the pipeline at Targa Resources Partners (NGLS), for example. (Targa is a member of my Jubak's Picks Portfolio.) Targa has just completed the fourth train of a fractionator that should fully contribute to revenue in the fourth quarter. Phase 1 of its Galena Park Texas, propane export expansion is on track for completion in the third quarter. The Longhorn, SAOU and Sand Hill projects are ramping toward full completion. and the High Plains plant is set for completion in mid-2014.
Prices for natural gas liquids have recovered slightly, climbing to $37 in mid-August. I think that's connected to a rally in the price of oil that may be only temporary. But looking at basic supply and demand (created by projects such as the expansion of export facilities), I think investors are likely to see a sustainable increase in the price of natural gas liquids in 2014 and 2015.
Buying energy MLPs with exposure to natural gas liquids now means that you'll pick up not just the current high yields, but also capital appreciation from the recovery in natural gas liquid prices. My two top picks in this sector are Targa Resources and Oneok Partners. A step down would be Kinder Morgan Energy Partners (KMP). All three are members of my Dividend Income Portfolio. They pay yields of 5.76%, 5.73%, and 6.32%, respectively.
I'm not as enthusiastic about REITs as I am about energy MLPs because I can't find any supportive trend for REITs similar to the what energy MLPs receive from natural gas liquids. The case for buying REITs right now rests pretty much on the foundation of my suspicion that the market has overreacted to prospects of a Federal Reserve taper, and that once the taper is actually announced, we'll see a rally in income assets.
That said, although I'd rather buy energy MLPs here, there are REITs with attractive current yields and with diversified real estate portfolios that are worth a look just on the yield story alone.
One of the most interesting to me is Agellan Commercial REIT, which trades under the symbol ACR-U.CN in Toronto. The current portfolio consists of 24 commercial, office and industrial properties in Texas, the U.S. Midwest and Ontario, Canada. The yield is 8.47%.
Of course, if you're looking for a REIT with a possible supportive trend, you might try Keppel REIT, trading in Singapore under the symbol KREIT.SP. The units dropped on fears that worries over the real estate market in China would infect real estate prices in Singapore. If you think those worries are overblown -- and I do -- you might take a look at this REIT, with its 6.68% yield. (Note that Singapore has a 0% withholding rate for overseas investors.)
When in 2010, Jim Jubak started the mutual fund he manages, Jubak Global Equity (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund did own shares of Chesapeake Energy and Keppel REIT as of the end of June. Find a full list of the stocks in the fund as of the end of June here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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"If you think those worries are overblown". Yeah, as if 99.99% of the readers of these words have a clue about the real estate, economic, and political conditions in Singapore and China!
An MLP!!! Peter Lynch has said buy what you know right? Can we sustain $4.00 a gallon, and consumer confidence keep rising? Syria fears? Time to buy BA or GE for the time being. Get your oil plays in now, because everyone just made a ton of money with the price fluctuation as of recent. I think a stern talking too is all that will happen but who knows with this Syria wacko, but i am not for sure. Get the factories going and quit relying on imports. JOBS = recovery, GDP = recovery. A chance to change now! Corporations and shareholders alike want to see profits while everyone without a job wants to see a paycheck. Toyota can do it and still make a profit. Others as well!
Mandatory requirement for Corporations to keep manufacturing of their products at 25% in the US.
It all changes when we come together as a whole!! Wishful thinking!! Meanwhile, I will take my profits as necessary and "Hope and Change". Not a chance!
These market shills just never stop, do they? Well....that is what they know; trying to get 'the pigeons' to sustain the unsustainable by investing in a dying, shrinking economy or 'non-economy' as the case may be. Ever the optimists, these shills are banking on past history that a 'recovery' will come along at some point. Sorry....ain gonna happen. There is no comparison, no historical data to use here. They believe, as all cornucopian's do, that growth can and will continue, which is fine if you have unlimited cheap oil and resources to plunder. $106 a barrel for oil will not work and oil companies are not going to go after the hard to get, expensive, low output volumes that are left for any less. It's not 'profitable'.
A term to become very familiar with: compressive contraction.
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