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Energy MLP insiders flash the buy signal

12 April 2016 in Trading Ideas

Key Takeaways

  • Company insiders and 10 percent holders have stepped up purchases of several MLP stocks.
  • Pipeline operators tend to be in business with stronger energy firms.
  • Motifs mentioned: Energetic MLPs motif

Energy stocks have had a whipsaw start to 2016, with many of them plummeting as crude oil fell to 13-year lows in February only to enjoy a surge as prices punched through $40 for a three-week intraday high.

And while uncertainty remains as to how well these stocks would hold up if oil continues to tread at current levels, it’s worth noting that one segment – master limited partnerships – has in the past month seen a surge of stock acquisitions by company insiders and equity holders who own at least 10 percent of the shares.

Among them, the shares of eight stocks worth nearly $500 million were snapped up by corporate insiders, according to SL Advisors, which follows the stocks:

Selected Insider Buying in Past 12 Months
Company Ticker Value in $millions % of Float Purchased
Crestwood Equity CEQP $90 9.4%
Enterprise Products EPD $185 0.5%
EQT GP Holdings EQGP $5 0.8%
Energy Transfer Equity ETE $108 0.4%
Kinder Morgan KMI $43 0.1%
NuStar GP Holdings NSH $16 1.8%
Plains GP Holdings PAGP $16 0.9%
Tallgrass Energy GP TEGP $23 1.7%

Source: SL Advisors1

A RBC Capital research report also highlighted recent insider buying, noting four MLPs were seeing huge stock purchases by management since the end of last year. Summit Midstream Partners LP (NYSE:SMLP) and Plains GP Holdings LP (NYSE:PAGP) each had more than 2 million shares purchased by insiders since the first of the year.2

Four of the eight MLPs mentioned above are in the Energetic MLPs motif, which has gained 3 percent over the past month. In that same time, the S&P 500 has risen 1 percent.

Over the last 12 months, the motif has fallen 28 percent; the S&P 500 is about flat.

Despite the plunge in oil prices, MLPs have generally been a popular investment in the energy sector because it’s thought they’re not as exposed to the ups and downs of commodity cycles as oil and gas companies, said Morningstar analyst Robert Goldsborough.3

In addition, MLPs are tax-advantaged entities that own operating assets such as pipelines, transmission infrastructure and storage. They distribute their excess cash flow as dividends, making them attractive to yield-seeking investors, and even more so in less certain market environments.

Tallgrass Energy Partners, for example, pays a dividend yield of 6.7 percent.

Still, about 25 percent of the sector’s cash flow is sensitive to the price of commodities, and that, coupled with poor market sentiment on MLPs, had led to a lot of pain in the sector.4

By the end of February, MLP stocks were reeling because the market was fearful that a prolonged slump in oil prices would cause weaker producers to go out of business, David Bahnsen, chief investment officer of the Bahnsen Group.5

That would hurt revenues by diminishing the volume of oil and gas flowing through pipelines owned by MLPs.

Lower oil and gas prices have also increased borrowing costs for MLPs, according to Curtis Holden, senior investment officer at Tanglewood Wealth Management. That is of particular concern as companies turn to issuing debt to fund new projects.6

All that said, it seems insiders ultimately saw a buying opportunity and took it. Chuck Self, chief investment officer at investment manager iSectors, told US News that even if a number of production firms shut down, it would only be a small percentage of total oil production. Additionally, pipelines have been around for decades and are servicing companies that are more likely to be in good financial shape, Seif said.7

Bahnsen added that while the market will punish MLPs that are highly leveraged, those with stronger credit, good contracts and enough cash flow to cover their dividends will be rewarded.

A continuing rise in oil prices shouldn’t hurt either.

  1. SL Advisors, “Insiders Are Reinvesting Back into MLPs,” March 6, 2016.
  2. Lee Jackson, “Insiders Are Backing Up the Truck to Buy These 4 Energy MLPs,” 247wallst.com, March 8, 2016.
  3. Matt Whitaker, “Bottoming MLPs Offer a Bright Sport for Energy Investors,” usnews.com, Feb. 25, 2016.
  4. ibid
  5. ibid
  6. ibid
  7. ibid

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