Don’ Try to be a MLP Hero

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November 30, 2014    2 pm

We are receiving notes on the potential purchase of upstream MLP’s by our readers. All we can really say is ‘don’t try to be a hero”.

Here is what we think will happen this week in the upstream MLP arena.  Likely that issues will bounce starting as soon as noon on Monday–the over reaction last week was on very thin volumes because of the holiday in the U.S. and a bounce almost always comes after these types of overreactions.  After the bounce issues will be fairly stable for a time (say a couple weeks) as crude oil prices seek a stable level.  Obviously we do not know what a stable price in crude is, but we think it is likely lower than $66 on West Texas.

Over the next month we think we will begin to see some exploration cutbacks by some of the shale drillers–there won’t be a choice as some have high cost structures – and their debt is massive.  Going out another couple months we will see distribution cutbacks–those that say ‘they are hedged’ so you can buy them are nothing but fools and we are seeing statement like this coming from major brokerages and banks.  There is NO upstream company that is 100% hedged so they will be selling a portion at ‘spot’ and hedges will roll off month by month.  For those companies with minimal hedges we can only ask–how many companies can withstand a 30-40% revenue decline and continue to spend at current levels?  After the exploration cuts you will begin to see not only revenue declines based on price, but revenue declines based on reduced production–the decline rates on most shale wells is huge in year 1 (by huge we mean anywhere from 25 to 75%).  If prices remain in the $60/barrel area we will see bankruptcies in some of the smaller E&P companies.

So patience is the key–let this game play out a bit before trying to be a hero.

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