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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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Time to Rebalance your MLP Portfolio

Interest rate volatility has made the dividend-paying stocks a minefield in the last several weeks and likely to continue to make them difficult investments to hold.  In the energy space, no subsector has been more sensitive to volatile interest rate fluctuations than the master limited partnerships (MLP's).

Virtually every stock in this subsector has taken a varying degree of pain from the recent sell-off in stocks, mostly on the back of the spike in the 10-year treasury rate, now over 2%.  But pensioners and many wealthy investors rely strongly upon these dividend (distribution) paying holdings. Although the group is likely to remain volatile and more sensitive to market fluctuations, there are better and worse MLP's to focus your investment dollar upon and now is a good time to rebalance your MLP portfolio to reflect this new market sensitivity. 

The more traditional MLP's, whose portfolios overwhelmingly include pipelines, remain the least volatile and more 'safe' as these are not as leveraged to the underlying commodity price and therefore represent less ultimate risk in a volatile rate world.  These pipeline MLP's, including Enbridge (EEP), Enterprise (ETP), Kinder Morgan (KMP) and Plains All-American (PAA) are also, not surprisingly, the lowest percentage distribution payers. 

Other MLP's, more influenced by commodity prices, are far more sensitive to market fluctuations even if the commodity price remains relatively steady -- this is the irony of the price action of these MLP's -- so, even if oil stays steady at $93 a barrel and gas stays steady at $3/mcf, these MLP's can give investors a very rocky trip.  Some examples of these commodity sensitive MLP's (for various reasons) include Linn Energy (LINE), Tesoro Logistics (TLLP) and  Atlas Pipeline partners (APL). 

So, being aware of what kind of MLP's you have and what kind you're looking to get into is critical to assessing your portfolio of MLP's and rebalancing it to a more challenging rate environment.  While the entire MLP world is going to be a more difficult place to be in the next several months as rates continue to gyrate, there are some relative opportunities emerging.  Two I would look at are Plains All-American and TransMontaigne (TLP). 

Plains is one of the 'safer' MLP's that hasn't stood still with its assets, expanding in the Bakken and with its own Oklahoma pipeline.  It continues to steadily increase its distribution - a total of eight times since March 2011.  Debt seems well in hand and it's had a nice drop in share price from its highs, trading now at closer to $54 a share.  To me, Plains is a solid MLP that has been painted with a sector-wide malaise that might continue, but at this price is a relative opportunity.

Transmontaigne is a smaller MLP with more exposure into terminals, including a recent percentage acquisition of the Bostco terminal project majority-owned by Kinder Morgan.  Because of this buy and TransMontaigne's proven ability to manage the acquisition, they've accumulated more institutional ownership of shares during the first half of 2013.  But just as quickly, rate volatility has been chasing many of these weakest holders away and Transmontaigne has swooned in price from a high of over $50 a share to under $42.  Although volatile, this is an opportunity to get a well-run MLP with growing terminal assets and a clean balance sheet at a discounted price.

Knowing what kind of MLP's are in your portfolio will help you find better values in the space, particularly necessary in what has become a very volatile rate environment.

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