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MLPs – Confusion and Fear

Master limited partnerships have had a tough year. A precipitous drop in energy prices, weak investor sentiment, adverse technical selling factors (closed-end fund deleveraging, short-selling by hedge funds, tax-loss harvesting), and recent issues surrounding one of the bellwethers of the industry, Kinder Morgan, have all contributed to the worst performance the sector has ever experienced. The price decline was likely exacerbated by alarmist—and sometimes inaccurate—articles published by the media and panic selling by investors who didn’t truly understand what they owned. While there is no denying that weak energy prices impact many of these businesses to varying extents, the current rout seems overdone, and opportunities will likely emerge from the carnage.

MLPs – Not All Alike

Master limited partnerships, MLPs, are often inaccurately portrayed as a collection of companies that do the same things and are affected by the same things. While there are similarities among MLPs—after all, they do mostly operate in the energy sector—their underlying businesses are actually quite varied. Some MLPs produce crude oil in uneconomic areas and may go bankrupt next year, while others transport natural gas out of the Marcellus Shale and are experiencing their best year ever. As a result, it’s inaccurate to group all MLPs together; yet investors have done just that this year, with their indiscriminate selling of almost every MLP.

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