One Horse You Shouldn't Change Midstream

Sure, midstream MLPs aren't the sexiest positions around, but I make it a point of presenting insider-inspired investment ideas for all investor types. MLPs seemed a better place for yield than the financial sector for sure.

That is still the case, but the antics of the smartest guys in the room have lowered the safety net for MLPs as well. They have fallen anywhere from 15% to 25% in recent weeks. The discount is, unfortunately in this case, logical. As we now know, the overpaid hot shots in our once-respected financial institutions screwed up so royally that they have seized up credit markets, and also economic growth. A recession (which I suspect we are already in) leads to less energy consumption on the margin, and less volume of oil and gas consumed, which means lower revenues for MLPs.

The price of oil and gas has already slid in expectation of the slowdown, and exploration and production firms have duly announced reductions in drilling budgets, given the less attractive price. So it's not a matter of MLPs having liquids no one wants in their pipelines. The producers will be putting less volume in the pipelines to begin with.

Capital Pains

Reduced volumes are not the only bearish fallout from the present crisis. Being capital intensive businesses forced to pay out most of their cash flow at the end of each quarter, MLPs need to tap capital markets frequently. That is a much tougher and/or expensive thing to do now that both credit and equity markets are in a tumult.

The capital-raising risk for MLPs is a much more vexing one than that of reduced volumes. It is less quantifiable, and, to the extent that an MLP has not saved a little something in the bank for this extraordinary rainy day, potentially more devastating.