Signs of a Thaw

The first quarter of 2017 is in the books, and it’s a good excuse to review recent trends within our portfolio and the wider energy sector.

The way I read these tea leaves, MLPs and other pipeline stocks have recently completed a textbook pullback within an ongoing uptrend. Your mileage may vary.

The Alerian MLP Index saw a total return of 3.9% over the last three months. That’s not quite as nice as the S&P 500’s 5.5% before dividends. Still, the Alerian’s on pace for an annual return of 16%, which would be more than decent.

Of course, almost all of that was January’s doing. The Alerian returned nearly 5% in January, a slight acceleration of December’s rally. But February was just about a wash and March produced a loss of 1.3%.

So the sector’s momentum was clearly flagging until MLPs regained 2.1% last week. But it was flagging not very convincingly.

The seasonal declines in oil and gas prices were one obvious catalyst for recent weakness. Even so, the Alerian’s year-to-date gain contrasts with a loss of nearly 7% for XLE, the Energy Select SPDR Fund ETF.  The XOP ETF more representative of shale drillers is down 9%+ since Jan. 1. In that context, a gain of nearly 4% by MLPs comes across as a vote of confidence and show of resilience.

Another clue is the general outperformance of the more speculative gas gatherers benefitting from the recent pickup in the pace of drilling.

We’ve certainly seen that with Sanchez Production Partners (NYSE: SPP), up 20% since I recommended it on Feb. 27. Refinery logistics MLPs and many of the maritime shippers have also done well.

The surviving upstream oil and gas producers, on the other hand, are in investors’ doghouse once again, and our expanded coal mining contingent has lagged as well, though I expect that to change later this year as natural gas and coal prices rally.

Even more painfully, Enbridge Energy Partners (NYSE: EEP) and its dividend-paying doppelganger Enbridge Energy Management (NYSE: EEQ) got slammed when the sponsor telegraphed a distribution cut without offering many specifics. As I’ve suggested, the retrenchment has more to do with diminished gas gathering revenue and the drilling slowdown in the Bakken than with the lucrative core franchise of moving crude from western Canada to U.S. refineries. And sponsor Enbridge (NYSE: ENB) has signaled throughout that it intends to support the MLP. Both EEP and EEQ remain modestly below new Buy limits set in late February. And we should know Enbridge’s restructuring plans by the time EEP reports first-quarter results in mid-May.

Stock Talk

Guest

Guest

What’s going on with CVI? This thing is swirling down the toilet with no end in sight. It’s killing me!

Igor Greenwald

Igor Greenwald

Definitely not working out as hoped so far, giving up the bulk of the Trump-related pop as investors show impatience with the RINs deregulation story and the refining industry’s continuing challenging fundamentals. But I think it would be a mistake to sell here.

Richard Bryan

Richard Bryan

If an MLP issues a 1099, does an investor still have to pay tax on recapture of distributions when sold?

Igor Greenwald

Igor Greenwald

What’s being recaptured in an MLP sale is the deferred depreciation, and it would work the same way for a 1099 payout qualified as a return of capital, I believe. It’s not an additional tax but rather the application of the personal income tax rate instead of the capital gains tax rate on the basis gains attributable to depreciation. Whereas qualified dividends reported on form 1099 would by definition be eligible for the lower dividend tax rate. So it depends on whether the 1099 issuer paid qualifying dividends or return of capital, and if the latter how much was attributable to depreciation. All that said, I should remind you that I’m not a tax professional.

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