A Bloody Monday for Energy Issues, But Term Preferred Stocks are Bargains

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After last week’s OPEC meeting, which ended as expected with no new limits on production, energy prices are tumbling sharply and predictions of future crude prices in the $20s abound.

Preferred stocks of some of the dicier MLPs (Master Limited Partnerships), which had already been sold down on expectations of possible distribution suspensions, are being driven down to levels that predict certain suspensions.

This morning, the three preferred stock issues of upstream MLP Vanguard Natural Resources (ticker: VNR), which had all traded in the $12 area as of last week, opened with losses of $3-4/unit and now are off nearly $5/unit. Preferred shares of natural gas upstream company Gastar Exploration (ticker:GST) are off around $1/share. Shares of other upstream company preferreds are off as well. But since many of them are trading with suspended dividends/distributions (we call MLP preferred dividends ‘distributions’) and already trade in the $1/$2 range, little further damage can be done.


Lower energy prices pretty much ensure that companies such as Breitburn (ticker: BBEP) , Magnum Hunter (ticker: MHRC), New Source Energy (ticker: NSLP) and GreenHunter (ticker: GRH) will be filing bankruptcy very soon. Investors should not be looking for bargains in the oil patch at this time as there is a high probability of further significant damage in the months ahead.

Way back in September, we wrote in a article titled “Still Holding Those Energy Preferred Issues? You Better Keep Praying” that anyone owning preferred issues of energy companies were simply speculating not investing. We realize we are more conservative than many investors, but major losses in a couple of the energy preferreds simply destroy hard fought gains. The year has been difficult enough for income investors, but “speculating” instead of exercising “conservative investing” has only made the matter worse. We are fortunate that we take our own advice most of the time, but even holding common units of 1 MLP midstream issue (NGL Energy-ticker:NGL) has been extremely painful.

Today’s slaughter in the energy arena did present an opportunity to those nimble enough to take advantage of bargains. The term preferred shares (preferred stock with mandatory redemption dates) of Tortoise Energy Infrastructure (ticker: TYG) and Kayne Anderson MLP (ticker: KYN) fell sharply earlier today with the TYG term preferreds off by 7-10%. TYG has a 4.37% issue (ticker: TYG-B) and a 3.95% issue (ticker: TYG-C) outstanding. These are $10/share issues which had been trading above $10, but fell as low as $9.30 this morning. We purchased additional shares of TYG-B this morning in our portfolios.

The Kayne Anderson preferreds fell by just 2-4%, so we passed on the opportunity to purchase more shares even though they were on sale. Recall that these are preferred shares of CEFs (Closed End Funds) and are rated AA by Fitch. Additionally, these shares are covered by the leverage rules laid out by the SEC act of 1940 — they must have assets amounting to at least 200% of the value of the preferred shares. We realize that coupons of 3.25% to 4.6% are meager coupons — but for a AA security it is darned good.

Capital preservation is always top of mind for us and, except for the 1 midstream company which we already own (and believe it is a good company) and term preferreds, we won’t be involved in energy issues.


Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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