Navigating the MLP Sector

As long as investors remain selective, there are more opportunities in the MLP sector, suggests Peter Staas of Capitalist Times. Here, he looks at spinoffs and takeovers, along with some favorite ideas to benefit from rising US exports.

Steve Halpern: We are here today with Peter Staas, editor of Capitalist Times. How are you doing today Peter?

Peter Staas: I'm doing great, Steve. Thanks again for having me.

Steve Halpern: You've spent a lot of time researching the world of master limited partnerships, looking at both the potential risks and rewards. First, looking at the risks, some observers worry that the MLP sector has become overvalued and others even worry that tax law changes could hurt the sector. What are your views of these concerns?

Peter Staas: I think that valuation is probably more of a near term concern for investors. I think one of the problems we see in the MLP space, in terms of how investors perceive it, is that there is an ordinate focus on the tax advantages associated with this security class, and also, the above-average yield offered.

And I think because of that focus, people sort of forget that these are actual operating businesses. And I think at this stage in the game, if you look at the MLP sector's total returns over the past five years, a lot of that was generated in the immediate aftermath of the financial crisis and market implosion.

In 2009 and 2010, MLPs outperformed massively. They survived without cutting distributions. The story of what was going on in the shale, oil, and gas space wasn't as well understood at that point. I think now people have caught onto that.

People know the best names in the space and investors need to be a lot more valuation-conscious. They just need to be patient and they need to remember that some of these names have a high valuation.

There invariably are pullbacks, especially when these names issue equity. That can be a good time to get into a higher-quality name. And sometimes, we see occasional hiccups in earnings, which is always a good time to get in.

As for the tax question, you can't say with a certainty, that the tax treatment of MLPs won't change at some point over the next decade, or whatever.

At the same time, the shale, oil, and gas revolution is generating real job growth in the US. If you look at the Bureau of Labor Statistics, employment trends based on sector employment, employment related to oil and gas extraction has increased by 22% over the past three years.

You are also seeing that uptick in economic activity translating into other parts of the economy. A lot of the infrastructures that these MLPs own, and are building, are really critical to the shale, oil, and gas revolution. I don't think that over the next several years, you are really going to see there's much risk of a tax change.

It is something to keep an eye on and you don't want to overweight. You want to have a balanced portfolio, and that would be a reason not to just own a portfolio of MLPs, for example.

Steve Halpern: On the rewards side of the equation, you've been looking particularly towards value-oriented situations and you focused on a select number of MLPs that could become takeover targets. What are you looking at there?

NEXT PAGE: Value-Oriented Situations

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