Best MLPs for $100 Oil

Master limited partnerships (MLPs) boast three main attractions: high yields, growing distributions and tax-deferral advantages.

Elliott Gue, MLP Profits

Brent sea crude oil traded above $102 per barrel yesterday (Feb. 1st) as the political turmoil in Egypt continues. Fears that the Suez Canal may be shut have caused many oil customers to hoard crude now while it is still available. West Texas Intermediate (WTI), the U.S. crude oil benchmark, has been rising too but is currently much cheaper at $91 per barrel. Has my article from last November entitled Crude Oil is Going to $100 a Barrel been proven true, or will you give me credit only when WTI prices hit $100? Let me know.

Why is Brent Crude Oil More Expensive than WTI Crude Oil?

An $11 spread in favor of Brent is very unusual; historically WTI has traded about $2 higher than Brent because it is slightly higher quality. But Brent crude is more susceptible to global oil demand spikes because it is closer to the majority of customers, so in times of global panic Brent wins out over WTI. WTI is also being hurt by some refinery shutdowns and increased Canadian imports, resulting in a supply glut at the delivery hub in Cushing, Oklahoma. It’s hard to believe that crude oil ETFs (NYSE: USO) (NYSE: OIL) have managed to lose money so far in 2011, but it’s at least partially explained by the fact that they are tracking WTI and not Brent. The other reason is that WTI futures are in a severe contango right now, which increases the costs of trading for these ETFs.

Energy-Sensitive MLPs are in a Sweet Spot

Most master limited partnerships (MLPs) are not energy-sensitive because they operate pipelines that get paid based on the volume of oil or natural gas shipped, not the price of these commodities. These are great “all-weather” investments that generate very predictable cash flows and consequently make up the majority of the recommendations in the MLP Profits “Conservative Portfolio.”

However, there are a few MLPs that are leveraged to high energy prices and outperform other MLPs in high-price environments. These U.S.-based MLPs with exposure to energy prices obviously do not benefit directly from Brent’s price run-up, but WTI’s $91 per barrel price is nothing to sneeze at either. Even if WTI stays around its current price level, energy-sensitive MLPs will do just fine. As Roger Conrad wrote last month to his subscribers of MLP Profits:

The biggest acceleration in growth from here, however, could well come from the more commodity-price-sensitive MLPs, assuming oil prices remain on solid ground.

E&P MLPs and G&P MLPs are Both Energy-Sensitive

There are two main types of energy-sensitive MLPs: (1) exploration and production (E&P) and (2) gathering and processing (G&P). The E&P plays produce oil and natural gas directly, whereas the G&P plays are involved in extracting natural gas liquids (NGLs) from natural gas. NGL prices track crude oil prices, not natural gas, so when oil prices rise (like now), G&P MLPs benefit even when “dry” natural gas prices remain in the dumps. 

Elliott Gue, co-editor of MLP Profits, explained the economics of “wet” natural gas (gas that includes NGLs) in his popular article Why Some Natural Gas is Worth $7.28. He has also provided readers with a full discussion of G&P MLPs (including a few specific stocks) in his article Upside for G&P MLPs. This article is more than a year old, so he may no longer favor the stocks mentioned, but at the time they included:

Gathering & Processing

Cash Distribution Yield

Regency Energy (NasdaqGS: RGNC).


Williams Partners (NYSE: WPZ)


Regarding E&P companies, Elliott’s article lists three companies. These MLPs have slightly higher yields on average since the exploration and production business is more risky:

Exploration & Production

Cash Distribution Yield

EV Energy Partners (NasdaqGS: EVEP)


Legacy Reserves (NasdaqGS: LGCY)


Linn Energy (NasdaqGS: LINE)


Another E&P play — Vanguard Natural Resources (NYSE: VNR) – was mentioned in my article Best and Worst MLPs of 2010. A full list of E&P MLPs can be found on the website of the National Association of Publicly-Traded Partnerships.

Find the Best MLPs for 2011 with the Help of MLP Profits

MLPs have performed spectacularly over the past two years and are likely to continue outperforming in 2011. Roger recently told MLP Profits subscribers that MLP fundamentals “still add up to average annual total returns of 10 to 15 percent.”

With crude oil prices rising above $100 per barrel and likely headed even higher, MLPs sensitive to crude oil and NGL prices may be the best-performing MLPs of all. To find out the specific names of the energy-sensitive MLPs Roger and Elliott like best right now, give MLP Profits a try today!