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"While we believe we are in oversold territory (and stocks are beginning to screen attractive long term), timing towards any sustained near-term relief remains very uncertain," wrote Morgan Stanley analysts Monday in a report on the Midstream Energy sector. They argued MLPs were getting caught up in the "energy macro trade."
MLPs, like real estate investment trusts, distribute most of their income directly to shareholders in the form of dividends. They generally tend to be in the energy transportation and storage businesses, which are less prone to price swings than oil producers. But MLPs have been hurt just as badly this time around. The benchmark Alerian MLP Index is down some 19% over the past three months, slightly less than the 22% drop in the Dow Jones U.S. Oil and Gas Index.
An MLP's dividend payout depends upon its ability to generate steady cash flow while growing through acquisitions. However, cash flows are expected to decline as energy producers cut back on production and balk at paying more to get oil and gas to market. MLPs also rely on the high-yield bond market to fuel growth through acquisitions. But they haven't been able to issue high-yield bonds for the past two months as bond investors grow wary of risks and demand prohibitively steep interest payments from MLPs.
A Goldman Sachs research report published Monday cited Linn and Niska as among the biggest underperformers in the sector. Niska shares were down 32% last week ahead of Monday's open and shares of both Linn and LinnCo (LNCO) (a separate company that invests exclusively in Linn) were both down about 27%. On Monday, shares of Linn and LinnCo were down 15% and 16%, respectively, while Niska shares were up 3.5%.