Investors and advisors convinced that master limited partnerships (MLPs) are "immune" from the turbulence roiling the energy markets are in for a rude surprise, Richard Bernstein said yesterday at IMCA's annual investment consulting meeting in New York City.
Bernstein, a former chief equity market strategist at Merrill Lynch who runs his own investment firm, noted that when MLPs gained popularity a decade ago they had free cash flow yields of 5 percent. Today, they have cash flow yields of negative 5 percent.
The upshot is that MLPs are piling on more and more debt to get "less and less yield," Bernstein said. He thinks executives in the energy industry are starting to worry about leverage in MLPs just as they face up what is likely to be an industry-wide debt restructuring crisis for many oil and gs companies.
Analysts telling MLP investors not to worry about counter-party risk may also be looking at the world through rose-colored glasses, Bernstein warned. It's not at all clear there won't be problems in that area.
The entire energy sector "was in a bubble and no one knew it," Bernstein told attendees. "The recovery will take years," not months.
Bernstein expressed amusement at the sight of energy executives on CNBC predicting a comeback for the industry in the second half of 2015. "Energy CEOs sound like technology CEOs in the summer of 2000," he said. "Everyone wants a bounce."
Small energy companies have "ballooned their balance sheets" by six- to 10-fold, Bernstein pointed out, but so far there have been very few writedowns. A wave of write-offs and restructurings is inevitable.
The talking heads on CNBC predicting that Exxon will just come in and buy up all the distressed assets in the business are way ahead of themselves in his view. Exxon may eventually scoop up some properties on the cheap, but they are likely to wait until the pain threshold becomes a lot more severe. And given Exxon executives' comments after their latest earnings reports, they would indicate the top brass at the world's largest oil giant believes the downturn will be long and painful.