Rebalance Your MLP Portfolio

 | Jun 06, 2013 | 5:00 PM EDT
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Interest rate volatility has made the dividend-paying stocks a minefield in the last several weeks, and it's likely to continue to make them difficult investments to hold. In the energy space, no subsector has been more sensitive to volatile interest rate fluctuations than the master limited partnerships, or MLPs.

Virtually every stock in this subsector has taken a varying degree of pain from the recent sell-off in stocks, mostly on the back of the spike in the 10-year Treasury rate, which is now above 2%. But pensioners and many wealthy investors rely strongly upon these dividend-paying (distribution) holdings. Although the group is likely to remain volatile and more sensitive to market fluctuations, there are better and worse MLPs to focus your investment dollar on, and now is a good time to rebalance your MLP portfolio to reflect this new market sensitivity.

The more traditional MLPs, whose portfolios overwhelmingly include pipelines, remain the least volatile and more "safe" as these are not as leveraged to the underlying commodity price and, therefore, represent less ultimate risk in a volatile rate world. These pipeline MLPs, including Enbridge (EEP), Enterprise Products Partners (EPD), Kinder Morgan Energy Partners (KMP) and Plains All-American (PAA) are, not surprisingly, the lowest-percentage-distribution payers.

Other MLPs more influenced by commodity prices are far more sensitive to market fluctuations, even if the commodity price remains relatively steady -- this is the irony of the price action of MLPs. So, even if oil stays steady at $93 per barrel and natural gas stays steady at $3 per McF, these MLPs can give investors a very rocky trip. Some examples of these commodity-sensitive MLPs include Linn Energy (LINE), Tesoro Logistics (TLLP) and Atlas Pipeline Partners (APL).

Being aware of what kind of MLPs you have and what kind you're looking to get into is critical to assessing your MLP portfolio and rebalancing it to a more challenging rate environment. While the entire MLP world is going to be a more difficult place to be in the next several months as rates continue to gyrate, some relative opportunities are emerging. Two I would look at are Plains All-American and TransMontaigne Partners (TLP).

Plains is one of the safer MLPs that hasn't stood still with its assets, expanding in the Bakken Shale and with its own Oklahoma pipeline. It continues to steadily increase its distribution -- eight times since March 2011. Debt seems well in hand and it's had a nice drop in share price from its highs, trading closer to $54 a share. To me, Plains is a solid MLP that has been painted with a sector-wide malaise that might continue, but at this price is a relative opportunity.

TransMontaigne is a smaller MLP with more exposure into terminals, including a recent percentage acquisition of the Bostco terminal project that's majority-owned by Kinder Morgan. Because of this buy and TransMontaigne's proven ability to manage the acquisition, it's accumulated more institutional ownership of shares during the first half of 2013. But just as quickly, rate volatility has been chasing many of these weakest holders away and TransMontaigne has swooned in price from a high above $50 a share to below $42. Although volatile, this is an opportunity to get a well-run MLP with growing terminal assets and a clean balance sheet at a discounted price.

Knowing what kind of MLPs are in your portfolio will help you find better values in the space, particularly necessary in what has become a very volatile rate environment.



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