3 Top Buys In The Bull Market No One Sees Coming

A headline from Bloomberg on December 15th: “The Bull Market Almost No One Saw Coming.” The article discussed how, in 2009, no one was predicting that the next decade would be one of the greatest stock market bull markets since the 1950s. The S&P 500 was at 756 on March 13, 2009. Now it’s at 3,200!

However, the energy midstream sector has not participated in the broader stock bull market for the last five years. When the price of crude oil collapsed in 2014, so did midstream, and it hasn’t been able to sustain a recovery.

You can see from this chart how the Alerian MLP Infrastructure Index (AMZ) peaked in August 2014, and now sits over 40% lower than the high set over five years ago. The investing public again fell into hate with the sector in mid-2019, driving values down by 25% over the last half of this year.

Over the last five years, companies in the midstream sector have been hard at work, strengthening their financial houses. Here are some of the steps companies have taken:

  • Master limited partnerships (MLPs) are no longer the preferred business structure. The sector is now a fairly even mix of MLPs and corporations.
  • The remaining MLPs have eliminated the high-cost incentive distribution rights (IDRs) paid to MLP general partners.
  • Most companies have lowered their debt to EBITDA ratios dramatically.
  • Distributable cash flow (DCF) coverage of dividends/distributions has been increased. Prior to 2015, DCF coverage of 1.05 to 1.10 was considered adequate. Now quality midstream companies have coverage of 1.4 times and up.
  • Growth projects are funded with internal cash flow, rather than the old-school practice of issuing new equity to raise capital.

Across the board, energy midstream companies are much more financially sound than they were five years ago. The only problem now is share prices that are down seem destined to stay that way, which brings us back to what we can learn from looking back to 2009. It is tough to find any market experts that are positive about the midstream stock market values.

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Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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