Upstream master limited partnerships (MLPs) have been generally devastated by the decline in oil and gas prices that began in the third quarter of 2014.
Some bankruptcies have occurred, and distributions – the MLP equivalent to corporate dividends and the reason most investors bought these companies – have been slashed.
However, one segment of the energy MLP universe has gone from strength to strength: companies whose principal assets are oil refineries.
These downstream MLPs offer yields well into the double digits, plus all the excitement of a quarterly earnings roller coaster.
While oil prices remain low, they’re an excellent investment – provided you don’t need to sleep at night.
A Refined Opportunity
According to the U.S. Energy Information Administration, U.S. oil refinery capacity has increased 14.8% since 1985, less than half of the 35% population increase during that period.
Although refiners have added capacity and several small refineries have been built recently, the last major U.S. refinery to come on stream was completed in 1977.
Additionally, environmental and legal harassments make it unlikely that refiners will add significant capacity in the near future.
Meanwhile, oil prices are down 50% in the last year, and demand for crude oil and refined products has risen by around 5%, with a further upward trend likely as consumers drive more and also shift to more gas-guzzling vehicles.
On top of all that, three more factors – the United States’ increasing self-sufficiency in crude oil, the lack of refined products available for import, and increasing overseas demand for products refined in the United States and Canada – have all put further pressure on U.S. refineries.
In total, these factors have produced a tightness in U.S. refinery utilization that’s not likely to diminish until or unless oil prices return to $100-per-barrel levels.
Accordingly, margins in the refining business are likely to remain elevated, and capacity utilization is likely to remain close to 100%.
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