The REDDEST Day of the Year for MLP’s

November 4, 2014   4:20 pm

While the overall equity markets were rather tame today the MLP’s got absolutely slaughtered.  Interest rates today wiggled around a little, but had no move worthy of a mention.

In the MLP’s the oil producers got hammered as well as those that provide goods and services to the drillers.  In particular the Frac Sand suppliers got wiped out (again).  Hi-Crush was off by almost 8%, while Emerge Energy was down by 6.4%.  The frac sand companies have simply been exposed as a non technically insulated industry — which also will certainly experience reduced demand in the months ahead.  These MLP’s are still just yielding in the 5.5-6% range after being knocked down from highs that they should never have been at to begin with given that frac sand is not a high tech business.

Linn Energy and LinnCo, both crude oil related companies took hits of around 8%, but their yields have climbed to the 13% area.  Certainly owners and buyers of the e and p companies are expecting reductions in distributions at some point in the future.  Yields of 13% are not a long term proposition for these MLP’s.

Crude Oil fell by a couple bucks, but after the initial drop on the market open this morning pricing firmed up and there was not real panic in that market–but now that we have breached the $80/barrel price on West Texas Intermediate the talk is of a floor in the $60/barrel area.  We hope this is just talk as we do not want the drilling boom to end—and it will skid to a very reduced levels by 2015 if prices fall much further.  

At this point in time, while there are no doubt bargains being created in this income area, we plan to simply stand aside.  We own no oil related MLP’s in models or personal accounts and this will remain true for the weeks (and maybe months) ahead.  If you own MLP’s hopefully it is just a small percentage so that your capital isn’t getting drawn down too much.  One likely is better off holding onto shares now (depending on which they are) as dire predictions of $60 oil could end up being silly.

To see the amount of red in the MLP space check here.