Individual investors own about 65 percent of MLPs, according to estimates by Wells Fargo Securities LLC. Many of them were attracted by analysts from banks, brokerages and research companies who predict that 93 of 114 MLPs, or 82 percent, will rise in value in the next year, according to data compiled by Bloomberg. All but five MLPs are recommended by the majority of the analysts who cover them, data show.
“At the top, everybody’s a believer,” said Tim Gramatovich, who helps manage $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “The question we’re all asking is how do we blow ourselves up next.” MLPs are “the next great investment debacle,” he said.
Blind Luck
Johns, the retired postal employee, read about MLPs online and listened to conference calls when companies announced earnings. He ended up putting $50,000, or 8 percent of his savings, into MLP shares through his online brokerage account with Vanguard Group Inc. The biggest MLP brokers are KCG Holdings Inc., UBS Investment Bank, Credit Suisse Group AG, the Merrill Lynch unit of Bank of America Corp. and Citigroup Global Markets, which handle a combined 59 percent of MLP trading, according to data compiled by Bloomberg.
Johns said he made about $8,000 within a year.
“I think it was just blind luck,” Johns said. “As Clint Eastwood said, ‘A man’s got to know his limitations.’”
Some of the skepticism is driven by the madcap pace of the U.S. energy boom. New methods of sucking oil from shale have fueled a 47 percent increase in U.S. production since 2011, the steepest rise in history, and will boost output to a 28-year high this year, according to the Energy Information Administration of the U.S. Department of Energy. Natural gas output is already the highest ever and growing. All that oil and gas needs infrastructure supplied by MLPs.
Apache Oil
Yet, production from shale drilling, which bores horizontally into rock deep under the earth’s surface, declines faster than crude from traditional vertical wells. Output falls by 60 to 70 percent in just the first year, according to Austin, Texas-based Drillinginfo Inc. By comparison, traditional wells take two years to fall by 55 percent before flattening out.
The first MLP was formed in 1981 when Apache Oil Co. rolled up private drilling funds and offered them to investors as publicly traded “units.” Its success drew a slew of companies to try out the new structure. By 1987, there were more than 100 new MLPs established, according to law firm Latham & Watkins LLP. The Boston Celtics, La Quinta Motor Inns and Sahara Casinos were among the companies that became MLPs to cut taxes.