Wall St Week Ahead-MLPs poised for bounce, but could be short-lived

Suburban Propane Partners

12/11/2017 18:00

(Repeats Friday story with no changes) 
    By Chuck Mikolajczak 
    NEW YORK, Nov 9 (Reuters) - Master limited partnerships 
(MLPs) have been beaten down in 2017, but conditions may be 
turning in their favor for a short-term bounce by year-end. 
    An MLP is a limited partnership that is publicly traded and, 
as such, enjoys the benefits of paying no tax at the company 
level as well as the liquidity that comes with being traded on a 
major stock exchange. 
    They generally deal in the production, processing, storage 
and transport of commodities such as oil and natural gas, which 
makes them sensitive to fluctuations in the price of the 
underlying commodity. A high dividend yield also makes them 
attractive in low interest rate environments. 
    But there has been a dislocation this year, as WTI  CLcv1  
and Brent  LCOcv1  crude oil have climbed about 20 percent since 
the end of August yet MLPs have yet to follow suit.  
    "If you told me what oil did, interest rates did, credit 
spreads, all of these things so far this year, I would say MLPs 
should be up 10 percent this year," said Jack Ablin, chief 
investment officer at BMO Private Bank in Chicago. 
    "Oil prices going above $55 a barrel, interest rates 
remaining pretty low, U.S. oil production seems to be pretty 
strong - if you take those factors and triangulate then MLPs 
should be a lot higher."  
    A recent Reuters poll showed oil will likely rally into 2018 
with periods of volatility as an anticipated extension of 
OPEC-led output restrictions offsets higher U.S. production. 
 urn:newsml:reuters.com:*:nL8N1N54UR 
    The Alerian MLP Index  .AMZ  is down more than 4 percent 
since Aug. 31 and nearly 15 percent for the year despite the 
climb in oil prices. That lags well behind the gain of more than 
4 percent in the broad S&P 500  .SPX  since Aug. 31 and 15 
percent gain for the year. 
    That decline has made MLPs cheap and coupled with their high 
dividend yields in a low interest rate environment, should make 
them attractive to investors. 
    The average dividend yield of the Alerian index is 7.8 
percent, according to Thomson Reuters data. Enbridge Energy 
Partners (EEP.N), and Suburban Propane Partners (SPH.N) are 
among the highest-yielding stocks in the index with dividend 
yields of over 9.5 percent.  
    "You buy things that are cheap, that have good income, you 
sit there and collect your dividend checks and kind of wait it 
out," said Stephen Massocca, senior vice president at Wedbush 
Securities in San Francisco. 
    "Fortunately you get these big dividends and it offsets a 
lot of the pain." 
    One factor that could work against MLPs could be 
seasonality, as investors begin to engage in tax-loss selling by 
the end of the year, when investors dump underperforming stocks 
in order to reduce or negate capital gains taxes. 
    The Alerian index has also become less correlated with oil 
prices themselves, with a 50-day correlation of negative 0.66 to 
U.S. crude, the biggest disconnect in four years. So as oil 
prices have increased, MLPs have gone in the other direction. 
    That could indicate investors are not convinced oil prices 
will continue to rally. 
     
    "You get into these bear super cycles, these long periods 
where it is really hard for prices to get going because there is 
just too much supply everywhere and it doesn't go away," said 
John LaForge, Head of Real Asset Strategy at Wells Fargo 
Investment Institute in Sarasota, Florida. 
    "If oil prices are not going to be headed above $60 and 
staying above $60, the growth profile for more and more projects 
just isn't there and I'm not going to bid up an MLP." 
 
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WTI Crude/Alerian MLP Index Correlation    http://reut.rs/2zuAhcE 
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 (Reporting by Chuck Mikolajczak; Editing by James Dalgleish) 
 ((charles.mikolajczak@tr.com; @ChuckMik; +1 646 223 5234; 
Reuters Messaging: 
rm://charles.mikolajczak.thomsonreuters.com@reuters.net)) 
  
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Keywords: USA STOCKS/WEEKAHEAD (REPEAT, SCHEDULED COLUMN, GR