I have an interest in “bottom fishing” in the Oil + Gas patch. Specifically you will see I have opened up positions in XOP and OIH this morning. I already have SLB and ECA that I opened last month – early but with same idea – price is basing and will start to move up with the right trigger. Seasonality and upcoming OPEC+ cuts in front of ARAMCO IPO would do it.
I also like the idea of AMLP as an investment theme, although technically it may need more time to prove it is done going down. I came across the following analysis by Harley Bassman, which offers up a solid reason for entering the MLP space…
The AMLP listed ETF is a collection of the larger fossil fuel MLPs that have not converted to a C-Corp profile. Notwithstanding its disadvantageous tax structure, its current yield of nearly 10%, or about 825bps wide to the T10yr, can only be explained as either a stupendous tax-loss motivated liquidation, or the realization that MLPs are a feat of financial engineering that is inherently flawed. Fossil fuels will not be eliminated in the near future, and their transportation from the ground to the gas tank is a necessary function that at some point must be a profitable venture. It is my fervent hope that MLPs are not the subject matter for Betheny McLean’s next best seller.
Spot price = $7.85, Current yield = 9.95%
Option expiry – January 21, 2022
Buy the call struck at $8.00 @ 60 cents
Max loss – the premium; Unlimited gain.
I detailed AMLP options in “Fail Better” – October 22, 2019. I predicted a bumpy ride with an expected drawdown: OUCH ! The stock promptly dropped 12% in four weeks, despite an increase in the dividend. As suggested, the option structure has cushioned the mark-to-market loss; but it still hurts. A 10% dividend for a listed 20-stock Index is the wrong number; either AMLP will rise in price, or the 19.5 cent dividend will be reduced to 14 cents. I suppose it is possible that the underlying MLPs are functionally a $200bn Ponzi scheme that relied upon rising oil prices to maintain the illusion of profitability; but I suspect the answer is a bit more banal. What we likely have here is a mismatch in capital where Retail investors have tossed in the towel and Institutional investors can’t or won’t buy a (K-1) partnership structure.
My best guess is that Private Equity will enter this space next year. PE firms have bulging commitments from desperate Pension and Insurance managers who need a 7%-handle return to close the gap with their liabilities. In the past six-months BPL jumped 28% and SEMG advanced 58% on take-over bids. Assuming the MLP business model is sound; this is Private Equity’s raison d’etre.
I like the APR17 $8C for $.25 to start.