Oil is down about $3.00 to under $88.00 per barrel and the fresh move to a record low in yields in the 10-year Treasury Note is meeting a growing concern about ‘risk assets’ for investors. Investors have already sold off many high-yield junk bonds and they have also moved to lighten up on their master limited partnership, or MLP, investments. The new mantra is safety even if many of these outfits have close to zero net direct exposure to the meltdown in Europe. What is so interesting is that MLP share prices (units actually) are not always supposed to be correlated directly with oil prices. In fact, some investors believe that the extremely low Treasury yields may send more total return and/or income investors into MLPs.
In a much larger piece we featured the new risks that investors need to consider this summer in the largest MLP entities. Now comes a fresh downgrade of Enterprise Products Partners, L.P. (NYSE: EPD) by Zacks to Neutral (FULL NOTE HERE). The downgrade noted that Enterprise reported decent earnings, but the fear is over a decline in segmental gross margin and macro risks compelled the downgrade. Enterprise is down 2.7% at $48.73 against a 52-week range of $36.36 to $52.95, and that puts the shares (units actually) down only about 8% from its 52-week high. Enterprise has actually help up better than many peers. There is a big sector risk here in this downgrade as Enterprise has a market value of $43 billion or so as the largest MLP out there in America. This matters if it sends the price much lower from here… Many ETFs, closed-end funds, and other MLP funds have enterprise weighted at close to 10% of their entire allocation so a big drop here could drag down all of the tracking products even if the entire sector did not move the same direction as the leader in the sector.
Zacks also noted that a competing MLP called Sunoco Logistics Partners (NYSE: SXL) is now only a Hold rating while calling it a Buy in another note from a different analyst. Sunoco Logistics Partners is down 1.9% at $33.81 against a 52-week range of $24.40 to $42.11 and the current price is down almost 20% from its high.
Even the great Kinder Morgan Energy Partners LP (NYSE: KMP) which is the second largest of the MLPs has fallen almost 13% from its recent all-time high. Its shares (actually units) are down 1.2% at $78.92 against a 52-week range of $63.42 to $90.60.
JPMorgan Alerian MLP Index ETN (AMEX: AMJ) is down 1.9% at $36.81 and shares are now down over 10% correction mark as the 52-week range is $31.52 to $41.68. The ALPS Alerian MLP ETF (AMEX: AMLP) is down 1.25% at $15.82 and it is nearing a 10% correction as its 52-week range is $13.10 to $17.19.
There are two closed-end funds we have tracked. Kayne Anderson MLP Investment Company (NYSE: KYN) is down 1.7% at $29.20 against a 52-week range of $22.87 to $33.10. The Cushing MLP Total Return Fund (NYSE: SRV) had a big gap-up on Tuesday, but shares are down 5.5% at $8.78 against a 52-week range of $8.01 to $10.65. The Kayne Anderson fund is down 11.8% from its year-high and the Cushing fund is down over 17% from its year-high.
Investors may want to pay attention over the next couple of weeks as Standard & Poor’s Ratings Services announced that it plans to hold a telephone conference call on Thursday, June 14, 2012 at 11:00 A.M. on the Master Limited Partnership sector.
What may help MLPs is if investors feel another couple of years or more of such low yields in the 10-Year Treasury Note will be upon us. If so, investors may flock to the MLP sector for those high payouts which include income and also a return of capital. Unfortunately, there is a growing concern over the tax structure of dividends for the wealthy. You can also throw in attacks on the tax breaks for oil companies which leaves some uncertainty here as many investors are not sure which aspects of “oil companies” those attacks really pertain to.
JON C. OGG