(Idea) Midstream MLPs Are The Income Trade For An Oil Supply Shock
By: Jon Costello
Energy investors regularly face the tradeoff between growth and safety. At the moment, the choice is more difficult than usual. Higher oil prices have significantly increased the prices—and, in many cases, the attractiveness—of E&Ps. Many are now at levels that imply little to no margin of safety if hostilities in the Middle East cease and oil prices fall. More broadly, the S&P 500 sits near record highs, and a deepening oil supply shock is exactly the kind of event that could end the run.
Even safety is hard to find. The typical safe haven, Treasuries, no longer look safe. The federal government’s fiscal position has raised questions about the prospects for longer-dated bonds.
So where is an income investor to go? I believe one of the best alternatives remains midstream oil and gas MLPs. These instruments offer the combination of tax-advantaged income, high income yields, and cash flow that will hold up through a shock.