by Michael Tarsala
The world still has a growing thirst for oil amid the continued worries of an economic slowdown in both Europe and Asia.
The oil cartel OPEC earlier this month raised its daily consumption estimate for 2012 and also upped its global oil use estimates for next year.
With the increased global demand comes an increased need to store oil and move oil from place to place through pipelines, says Andy Fletcher of Fletcher Wealth Management, the firm that manages the Oil and Gas MLPs investment model at Covestor.
MLPs are unique securities focused on the oil industry that have the tax benefits of a limited partnership. They are required to pay out a large portion of their earnings as dividends in order to receive that special tax treatment. As a result, they typically offer more than double the yield of a 10-year Treasury.
Fletcher says that a major trend among the oil companies this year is to divest their midstream assets to focus on their core businesses. That is creating growth opportunities for some oil MLPs including Buckeye Partners (BPL); an investment that he added to his Covestor model in early August.
Buckeye’s recent acquisitions have added terminals and storage capacity for crude oil and other refined products to its asset list.
“Based on the locations of these assets, and the terminals already being operational, as opposed to needing to be built, we see them being accretive in the event of increased demand,” Fletcher says.
According to Fletcher, Buckeye has several advantages to finding cash to fuel its growth. First, there are stable cash flows from its pipeline business, which in some areas have regulated annual rate increases, providing an inflation hedge.
Second, the company’s MLP status allows it to pass income and expenses through to its limited partners. This essentially negates taxation at the corporate level, freeing up cash for operations and additional acquisitions.
Finally, incentive distribution payouts were removed when it merged with its general partner in 2010, decreasing the cost of equity.
The company’s dividend distribution is now yielding 8.3%, a rate above its 5-year average of 7.3%. It has traded as high as $68.45 and as low as $44.55 over the last 12 months and is now at the lower end of that range, priced below $50 as of Sept. 19.
If you would like to learn more about MLP-focused investments or other yield-producing investment options, call Covestor at 866-825-3005 ext. 703. We are happy to provide more information and help you decide if a yield-focused investment strategy might be right for you.
photo by: Roger Davies
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. We believe that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
The investment discussed is held in client accounts as of September 20, 2012. This investment may or may not be currently held in client accounts. The reader should not assume that any investment identified was or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
