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‘We’ve Got to Be Close to the Bottom’ on Energy: Cushing Founder

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For MLPs, today’s low energy prices make it very much a “best of times, worst of times” story, according to experts with Cushing Asset Management in Dallas.

“So much has happened since the end of June and in July — it’s been one of the worst, most volatile months I’ve seen in some time,” said Jerry Swank, managing partner, founder and portfolio manager of Cushing, on its second-quarter call with investors Tuesday.

Crude oil fell 44% in the 12 months ending June 30, while natural gas prices dropped 37%.

This means that the valuations of many master limited partnerships have crashed as well, giving investors a chance to move into the sector.

“This is the most negative sentiment I’ve felt for a long time,” said Swank, who has followed the energy business for 41 years.

“Everyone has thrown in the towel. Everyone is so negative, we’ve got to be close to the bottom” of the energy price decline, he added.

In January, Swank said the group thought there was an 80% chance the price hadn’t hit the bottom. In April, it said there was an 80% chance that it had. “Today we are nervous, but we would say we have seen the bottom,” the expert state

This means buyers can step up. “The fundamentals are not nearly what the market has been telling us in the last few weeks,” Swank explained.

Yield Play

Overall, midstream MLP yields are at 6.4% as of June 30 vs. 2.4% for 10-year Treasuries and 4% for utilities and real estate investment trusts.

As for Cushing’s three MainStay funds, their 12-month yields and distributions are at 13.8% for the upstream fund (CURAX), which tracks exploration and production companies; 7% for the midstream fund (CSHAX), which tracks transit and related companies; and 2.7% for the downstream fund (CRZAX) which tracks refiners and end users.

“The current yield [on the upstream fund] is upwards of 10%, and our model says the dividend is going to be paid,” Swank explained.

Asked about Wall Street’s concerns about future distributions, he stressed that these MLPs “have been able to maintain their distribution” over time.  

Midstream Madness

Meanwhile, the weak prices of midstream MLPs have the energy expert “flabbergasted, because the second-quarter earnings we follow in our model is very much intact.”

Companies in this part of the industry are “doing just what they should be doing,” Swank adds. “These are great stocks that are down 30%, and there’s been no change [in how they do business]. They continue to stage IPOs, for instance, and do mergers and acquisitions.

“The fundamentals are very intact,” he said, “… and the valuations are cheap. Distribution growth continues to come through.”

MLP companies should reverse from today’s levels, “as they’ve done in the past,” Swank explains. “Sober investors should take advantage of the disconnect … and put money back into these sectors on a gradual basis.”

Still, the MLP expert admitted he advised investors to take this approach in April, and then energy prices fell further: “There were more sharks in the water than I thought there were.”

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