One Horse You Shouldn't Change Midstream

I own several midstream energy master-limited partnerships (MLPs), which have gone from being seemingly safe income plays to being as hard hit as other more obviously risky plays due to the present market meltdown. But that doesn't mean that the companies themselves have become any riskier. What it does mean is that you may have to pay closer attention to their balance sheets than you might have previously. Having done that, I have one that I think presents an opportunity here. But first, a little background.

Insiders were (and still are in some cases) active buyers in these firms, which transport oil, gas and related liquids from where they are produced (downstream) to where they are refined and consumed (upstream). Terminalling and storage of these commodities are also usually a part of the business mix of most midstream MLPs.

It takes a lot of capital to build out the infrastructure that is the backbone of MLPs' business. The MLPs then generate revenues based on the volume of product put through their infrastructure. The price fluctuations of the underlying commodity being transported do not generally affect their revenue. They are not in business to speculate in commodity prices. They just move the stuff.

With so many new sources of gas and oil being found with advanced exploration methods, MLPs have been busy connecting the new production sites to their existing arteries. The build-out bodes well for MLPs to increase their capacity, and therefore their revenues.

The sound fundamentals of both increasing supply and demand of oil and gas moving through pipelines made the 6% to 8% indicated yields of MLPs appear attractive to me, and others looking for some yield. With increasing volumes leading to increased payouts, capital gains in the mid to high single digits also appeared reasonable to expect.