As the Chief Investment Officer and Founder of Bramshill Investments, Art DeGaetano harnesses fixed income market insights based on market theories but also real life experience. Recently, he contributed his professional opinion to a Barron’s article titled, “Why MLP Investors Shouldn’t Panic as Oil Prices Fall.”
The Barron’s piece described how investors in energy-focused master limited partnerships may be having flashbacks to 2015 when there was a shocking 33% plunge in the index. It went on to say that MLPs shouldn’t be in for a repeat of that free fall; the biggest differences appear to be that MLP finances are on “much firmer footing” and big declines in production costs are still allowing some U.S. producers to operate profitably—even with oil at this price.
Art’s contribution to the article was an optimistic one. He noted that MLP debt has held up well, even as stock prices have fallen, and it gives Bramshill some confidence that we aren’t heading into a liquidity issue. In 2015, spread widening was dramatic. Art also shared that he’s been adding some MLPs, including convertible preferreds issued by Kinder Morgan (KMI). Convertible preferreds trade like the equity, but yield more. For example, KMI yields about 5%, while the stock yields 2.6% after a large dividend cut in 2016.
Some Barron’s readers had their interest piqued by Art’s comment about KMI and contacted Barron’s, asking to know more. Art provided this additional information for the readers:
We bought the KMI Convertible Preferred (KMI 9.75% 10/26/18) several years ago as the significantly higher dividend with a name that we felt was oversold provided an attractive entry point. We still hold the position as it has a strong correlation to the equity with a .9 delta and we like the KMI story. We believe KMI is undervalued relative to its stable, growing cash flows and will re-rate as investors gain confidence in stability/growth of cash flows.
To learn more about our thoughts on convertible preferreds, as well as additional market insights, be sure to read the Bramshill Investments June 2017 Portfolio Commentary.
Stephen Selver is the CEO at Bramshill Investments, an asset management firm specializing in absolute return solutions within fixed income and income producing assets. Click here to view his bio and other team members of Bramshill Investments.
Past performance may not be indicative of future results, which may be impacted by unforeseen economic events or evolving market conditions. The indices quoted are included for illustrative purposes only, as an index is not a security in which an investment can me made. Certain statements are forward-looking and may not come to pass. The analysis of the current portfolio holding referenced above is provided for illustrative purposes only and is representative of how the Firm convertible preferred securities. Investing involves risk and there can be no assurance that an investment will achieve a specific investment outcome. The top and bottom five performing positions for the time period reference may be available upon written request.