A Massacre Like No Other

We have never, ever, seen a massacre of a large sector like the one that took place in the MLP segment today.  While the upstream oil and gas companies took the brunt of the hit, losses spilled over to all kinds of segments of the partnership arena.

We have cautioned time and again to stay away from the upstream companies, but we know some supposedly conservative income investors have continued to try to ‘pick bottoms’ on not only the common units, but also on the preferreds. 1 writer on Seeking Alpha has been calling bottoms on Linn Energy LLC (ticker:LINN) for the last $27 dollars (he said buy at $30 and as recently as a few weeks ago was certain it was a good buy)—the shares traded as low as $3.26 today.  We owned some shares of Linn back in January, but sold them for a small loss just weeks after purchase.

Last fall/winter we thought that rig counts in the oil patch would fall by 50% by June, 2015 and we were right on the mark with that call, but our call for falling production really missed.  Who would have predicted that rig counts would fall this much without a corresponding reduction in production given that unconventional shale wells have such rapid declines? Certainly not us. On the other hand we know better than to get carried away buying ‘bargains’ that aren’t real deals.  We had also predicted that by fall (September/October) upstream energy MLP’s would slash their distributions.  Now it is happening in earnest with Linn Energy and LinnCo (ticker:LNCO) announcing total eliminations of distributions as did New Source Energy (ticker:NSLP).

MLP’s taking big hits were Atlas Energy (ticker:ATLS) taking a 16% hit, Atlas Resource Partners (ticker:ARP) down 15%, Eagle Rock Energy (ticker:EROC) off 11%, Legacy Reserves (ticker:LGCY) down a massive 23%, Memorial Production (ticker:MEMP) down 11% and on and on.  Related preferred issues also took big drops as investor begin to lose confidence in the ability of these companies to pay distributions on preferreds.  Once the common unit distributions are eliminated preferreds are next in line for suspension.

The bottom line is that a conservative investor would have nothing to do with these issues.  A speculator might have interest–and sometimes the casino wants to suck us in, but we WiLL NOT be touching anything related to these usptream issues for a long time.  With oil prices tumbling again and thousands of drilled, but not fracked, wells out there we WILL see liquidations of some MLP’s—don’t be sucked in by the ‘we are hedged’ line being used by some. Linn Energy is completely hedged, but their units are now trading at $3.