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Martin Tillier

Martin Tillier

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Why This MLP (And Others) Represents A Value Trap

After a tumultuous period for energy investors it is beginning to look as if some degree of calm and logic is returning. WTI crude oil has twice bounced off of the mid-$40s level, suggesting that a real bottom has, at least for now, been found. The obvious response of investors is to start casting around for value. Even now that the panic is over there is still plenty to be had. That doesn’t mean, though, that everything which has lost ground is worth buying.

As I have mentioned several times in the last few weeks, buying large, multinational companies, either diversified firms such as Exxon (XOM) or Chevron (CVX) or oilfield service companies like Anadarko (APC) or Halliburton (HAL), is almost guaranteed to pay off in the long term. These are firms that have vast experience of surviving through the swings of a highly volatile commodity market. A period of reduced revenue will hurt, but it won’t be fatal. There are even some smaller, riskier plays worth considering, usually when hedging policy has bought those smaller companies time. There are two areas where investors should exercise extreme caution, though.

Companies that borrowed heavily to participate in the U.S. oil boom when crude looked set above $100/barrel face an obvious debt servicing problem with oil at about half of that. Many are now operating at a loss, but even those that are making money are facing an unattractive cash flow situation. Not only are interest payments that looked reasonable…

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