Every quarter I make it a point to read the earnings releases and conference call transcripts from all the leading publicly traded private-equity firms. The private equity mindset of buying assets on the cheap and holding them for a very long period of time is something most individual investors should adopt, as it would greatly improve performance. Studying quarterly reports will also often provide valuable investment information. This quarter was no exception, as managers of the large PE firms had some very similar comments on energy-related investments.
The common theme: They all took a hit on energy investments in the quarter and all believe that prices could very well go lower in the short term. Josh Harris at Apollo (APO) said his firm thinks the outlook in the oil patch will definitely get worse before it gets better, while David Rubenstein at Carlyle (CG) said he thought there would be opportunities to buy in the oil sector at lower prices. However they both believe the long-term outlook is much brighter -- with Rubenstein even saying that energy represents the best investment in the world, right now.
This does make me feel a lot better about all of the energy-related stocks I bought last year. After cleaning out the financially weaker companies earlier this year, I am not all that concerned about the stocks I have left. I am pretty certain that companies like Rowan (RDC), Gulfmark Offshore (GLF), Tidewater (TDW), Gulf Island Fabrication (GIFI) and WPX Energy (WPX) will be around long enough to thrive when oil prices do go back up.
I practice what I preach: I intend to hold these stocks on a private-equity timeframe and am quite confident I will sell them, someday, for a lot more than I paid. Having said that, I am not showing my wife the retirement-plan statement right now, so she doesn't see how far they have fallen in less than a year.
It also started me thinking about current opportunities in the sector. It is hard not to notice the carnage in Master Limited Partnerships, of late, as prices have plunged by 50%, or more, for some names this year. I have avoided MLPs for the most part as yield-seeking investors pumped up the prices over the past few years --and they were hardly a bargain. As they have fallen, the yield chasers have been dumping shares as quickly as possible, and the whole sector appears cheap.
I am not an expert on oil and gas MLPs, but fortunately I do not have to be. Tortoise Capital has been around since 2002 managing portfolios of energy MLPs for institutional and public customers. As a bargain-seeker, it is even better to hear they run closed-end funds of MLPs that currently trade at a large discount to their net asset value. The MLPs have plunged and are bargains by themselves, but by using the closed-end funds I can buy them at a discount to the discounted valuation of the assets.
Tortoise MLP Fund (NTG) invests in names with an emphasis on natural-gas-related assets. The top ten holdings make up 64% of the portfolio, and include some well-know names, such as Enterprise Product Partners (EPD), MarkWest Energy (MWE) and Spectra Energy (SEP). The fund trades at a 12% discount to net asset value, so you are buying bargain issues with an additional discount. The shares have a distribution rate of 8.7%, so you are getting paid to wait for conditions in oil and gas to improve.
Tortoise Pipeline & Energy Fund (TTP) buys companies that transport natural gas, natural gas liquids, refined products and crude oil. No matter what happens to energy prices, pipelines and other energy-infrastructure companies are going to be needed to move and store oil and gas -- and this fund owns most of the MLPs and listed corporations that make up much of our national pipeline network. You can buy the fund at a 15.6% discount to NAV and enjoy an 8.6% cash distribution, until pricing improves.
Adams Natural Resources Fund (PEO) is a closed-end fund that has been around since January 1929 -- and is a great vehicle to start buying the energy sector. The fund invests in energy and natural resources stocks and has a decided blue-chip flavor to its portfolio. The top 3 stocks, Exxon (XOM), Chevron (CVX) and Schlumberger (SLB), make up 30% of the fund. The next three are Phillips 66 (PSX), Occidental Petroleum (OXY) and EOG Resources (EOG), and, combined, they account for almost 15% of the portfolio. With PEO, you are buying a portfolio of oil and gas blue-chip stocks at a 16% discount to their current price. The fund has a policy of distributing at least 6% of its assets per year, and right now the distribution yield is 6.6%.
These closed-end funds represent a way to buy oil and gas at discount to already bargain prices, but be prepared to own them a long time and anticipate high levels of volatility. If you stay small, move slow and scale in, this might, indeed, be the best investment in the world.