One issue which has caught the market’s imagination recently is whether the oil rally will continue or if its advancement is already over. Many believe that OPEC’s sincere attempt to lift crude prices through an output cut (as announced on Nov 30, 2016), has failed.

Though the producer bloc’s accord is considered to be its best shot at boosting oil prices, crude price advancement has been cut short by the resurgence of exploration and production by U.S. shale payers. It comes then, as no surprise that the commodity has begun to slip again.

Crude weakness has been dulling the prospect of master limited partnerships (MLPs) – generally considered to be the ‘safe haven investment’ for energy investors – and we believe that it may be wise for investors to avoid investing in these stocks at least in April. Not only is the current business scenario unfavorable, but the Zacks Industry Rank for Oil & Gas Refining & Marketing MLP and Energy & Pipeline MLP industries is unimpressive.  

What are Energy MLPs?

It is a well known fact that MLPs deal in natural resources. They have two classes of owners – the general partner (GP) and the limited partners (LP). While GPs basically refer to a major energy firm or investment fund, LPs are the unitholders. These entities are exempted from paying taxes at the partnership level and pass on most of their income to unitholders.

MLPs typically distribute nearly all of their cash flows back to unitholders. They are not required to pay a corporate income tax as the tax liability of the entity is also passed on to unitholders in the form of a cash distribution. This allows MLPs to offer very attractive yields to investors.

Finally, the assets that these partnerships own – oil and natural gas pipelines and storage facilities – typically generate stable fee-based revenues and have limited, if any, direct commodity price exposure. Factors like these enable MLPs to offer fairly growing distributions.

Unfavorable Zacks Industry Rank

Among the industries in the Oil & Energy sector, Oil & Gas Refining & Marketing MLP industry and Energy & Pipeline MLP industry are among the lowest in the industry rank list. The Oil & Gas Refining & Marketing MLP industry holds rank #243 and is among the bottom 5% of the industries. The Energy & Pipeline MLP industry is ranked #233 and is among the bottom 9% of the industries. 

Investors should know that the bottom 50% of the Zacks Ranked industries is likely to underperform the top 50% by a factor of more than two to one. For more information please refer to our Zacks Industry Rank.

Adverse Business Scenario

We need to be mindful of the unfavorable operating environment for midstream businesses. Both oil and natural gas prices are considerably lower compared to those prevailing in early 2014. Weak commodity prices mean lower incentives for exploration and production companies to pump oil and natural gas out of the ground.

Lesser exploration and production activities, in turn, have been leading to lower demand for transportation and storage activities. We expect this to continue hurting the business of firms belonging to the Energy & Pipeline MLP industry. 

Furthermore, demand for gasoline – the end product for refiners – is well below the record level it hit in Aug 2016. This is not good for refiners and unfavorable for the Oil & Gas Refining & Marketing MLP industry.

MLPs to Avoid

We have picked out five MLPs that should currently be avoided owing to factors discussed above. The MLP’s either carry a Zacks Rank #5 (Strong Sell) or 4 (Sell).

Headquartered in Tulsa, OK, Cypress Energy Partners LP is the provider of independent pipeline inspection and integrity services to producers and pipeline firms. Lower transporting services could result in reduced pipeline inspection activities for the partnership.

The partnership currently carries a Zacks Rank #5. The earnings surprise history of Cypress Energy is also disappointing.  It had an average negative earnings 125.99% in the last four quarters.

Genesis Energy LP (GEL Quick QuoteGEL - Free Report) - Headquartered in Houston, TX- is the operator of oil pipelines. It also gathers and markets crude in North America. The partnership has a Zacks Rank #5 and missed the Zacks Consensus Estimate in three of the last four quarters with an average negative surprise of 18.72%.

Headquartered in The Woodlands, TX, Western Gas Equity Partners LP is involved in operations like gathering and transporting natural gas, condensate, natural gas liquids and crude oil, primarily in the U.S.

The partnership has a Zacks Rank #5. The Zacks Consensus Estimate for the partnership’s first-quarter 2017 earnings has been revised downward over last 30 days.

Sprague Resources LP which is headquartered in Portsmouth, NH is involved in operations like distribution and sale of refined products.

The Zacks Rank #5 partnership missed the Zacks Consensus Estimate in each of the last four quarters.

CVR Refining LP based in Sugar Land, TX is involved in the refining of petroleum, mainly in the U.S.

The Zacks Rank #4 partnership has an average negative earnings surprise of 11.29% in the last four quarters.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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