Compelling Bear Market Potential From High Yield MLPs

The energy sector bear market caused by the steep declines in energy commodity prices has produced truly ugly results in the share and unit values across the energy spectrum, from upstream, through midstream, and including downstream. One result of the massive sell-off is an extensive list of MLPs with very, very high current yields. As I write this, one-fourth of the MLP space is yielding over 20% and two-thirds yield over 10%. These yields indicate that one or two beliefs from the market:
1. That there will be massive distribution cuts across a large portion of the MLP space.
or
2. Investors have decided that they don't like the price volatility and will accept any value just to get out of these investments.
I think lately it's been more number 2 vs. number 1. As I just read in an interview with an MLP focused fund manager, "Predicting irrational behavior is a fundamentally flawed exercise." It seems likely that many/most/a majority of the midstream MLPs that are now priced to yield over 20% will be able to maintain or even grow their distribution rates. These companies still have business that are primarily fee based and not dependent on energy commodity prices.
These level of potential irrational prices provide the opportunity for tremendous total returns from current MLP unit values. Those returns depend on what yield is reasonable in a normalized market for a tax-advantaged higher yielding investment with stable revenues and free cash flows.... Read more