This is insane

[dan_s]

The Energy Letter
'We're In Total Insanity Mode'
1/20/2016 By Jennifer Warren

Jay Hatfield, fund manager of the actively managed InfraCap MLP Exchange-Traded Fund (NYSE: AMZA), spoke with our correspondent Jennifer Warren on Jan. 12, the day oil prices fell below $30 per barrel for the first time in 12 years. Hatfield is a co-founder of NGL Energy Partners (NYSE: NGL).

JW: MLPs have been hit hard in recent months, while more recently producer stocks had recovered some value. Do you expect valuations of MLPs to recover by the second half of 2016 when supply is expected to tighten, raising oil prices?

JH: The large-cap stocks of the Alerian MLP Infrastructure Index (AMZI) are what I consider the investible asset class of MLPs. For retail investors, I do not recommend small-cap MLPs, or shipping and sand MLPs. Because of the crash in upstream MLPs, the lower quality ones like shipping and non-MLPs like Kinder Morgan (NYSE: KMI), MLPs have become virtually 150% correlated with oil prices and oil stocks. For example, oil stocks are down 2% today, and MLPs are down 5.8%. They have become one of the riskiest asset classes in the U.S. stock market. There is a very major disconnect. They are probably not going to rally significantly until oil rallies. Even if that's irrational, we believe that to be the case.

JW: What is your primary explanation for the decline in the MLP sector overall? Has the negative sentiment been warranted or is it a bit too panicky?

JH: We think that some decline was warranted. However, we're in total insanity mode at this point. At this point, there's no analysis going on. Today Plains All American Pipeline (NYSE: PAA) announced a pretty big equity deal with a private placement, convertible preferred units, and they will maintain their distribution. That's the third-largest partnership in the AMZI. (There are only 22 components.) Three were most at risk. NGL Energy Partners (NYSE: NGL), which sold an asset for 40X cash flow, reaffirmed their dividend and de-levered. ONEOK Partners (NYSE: OKS) reaffirmed their dividend, and the stock rallied 20%. Plains re-affirmed their dividend, and the stock went up 20%. All the data points to the positive, but nobody cares.

JW: Did the announcement by Enterprise Products Partners (NYSE: EPD) of a planned 5% increase in distributions for 2016 bolster the market?

JH: We think so. We think there's going to be more private equity investments in corporate securities or buying assets. There could even be major acquisitions because the disconnect is so profound. Again, I'm not sure anyone is going to care except for that day -- unless oil prices rally. I believe they should rally off of this $30 level, but now it is also subject to short-term irrationality. Economically it should, but I can't guarantee it from a trading perspective.

Send me an e-mail if you want to see the entire article: dmsteffens@comcast.net