Last week, the Associated Press ran a feature story chronicling recent woes of small investors burned by the implosion of master limited partnerships (MLPs). As the AP reported, brokers steered “Mom and Pops” to MLPs promising them “fat payouts.” As many of you already know, this story doesn’t end well.
While the AP misses the mark on many MLP nuances, it does get a few things right. In particular, that these energy partnerships “borrowed heavily” and were “running big risks even when oil was twice as high.”
For the record, Hedgeye Energy analyst Kevin Kaiser was among the first (and certainly most vocal) analysts warning about the dangers of MLPs. His non-consensus research has been unrelenting in questioning the dubious accounting practices of many MLPs. He held his ground and stuck with his conclusions, even in the face of the overwhelming majority of Wall Street analysts – on both the buy and sell sides – who didn’t even bother to dig for facts, but assiduously retold managements’ version of the numbers.
In a research note, written in May 2014 well before the MLP blowup, Kaiser recalled laying out his short case during a meeting with seasoned money managers who knew little about MLPs beyond their tax-exempt status and high current yields:
“I traveled to Omaha, Nebraska two weeks ago to pitch the bear case on Master Limited Partnerships to a group of value investors. Buffett couldn’t fit me into his schedule, but I was lucky enough to meet with seasoned money managers cut from the same cloth… So I walked through a few of the more surreptitious aspects of the [MLP] story: the enormous “incentive” fees that many MLPs pay to their General Partners; the conflicts of interest and limited fiduciary duties; the gimmicky accounting; the serial capital raising; and the valuations.”
“It’s been said that there are no new eras, only new errors – most things in finance are cyclical. We look at the fees that some of the largest MLPs are paying to their GPs today and wonder if this time will be different. How long can a business that pays two-thirds of its income to its manager survive?”
Click here to read Kaiser’s entire note on MLPs.
At one point during his presentation, an audience member chimed in, “The whole thing seems like a big Ponzi scheme to me.” Kaiser didn’t disagree, simply replying that his compliance officer preferred that he not use that language.
Take a look below at Kaiser’s short calls on MLPs (and the company's performance versus the Alerian MLP index):
*Data through 11/02/2015. Price only, does not account for distributions.
Clearly, being long MLPs has been a costly bet for investors. According to the AP’s story, in the past year, investors have lost $20 billion in publicly-traded drilling partnerships, or $8 of every $10 they had invested. It gets worse. Add in the bonds sold by these partnerships to investors since 2010 and the losses total $57 billion.
YTD PERFORMANCE UNEQUIVOCALLY RED FOR MLPS
Sadly, many of these misinformed investors will never recoup those losses before retirement.
For the record, when Kaiser was warning investors and making these calls, many people were defending MLPs in earnest. One in particular was Kaiser’s short call on Linn Energy (LINE) which may ring a bell for anyone who has been following this unfolding train wreck.
Kaiser’s well-reasoned short case on LINE drew a lot of attention, especially from CNBC’s equity market mouthpiece Jim Cramer and hedge fund manager Leon Cooperman, a Linn shareholder who came to the stock’s defense in a letter published in Barron’s.
There was also Business Insider, which as you can see in this article here, clearly missed the mark, siding with Cramer and LINE bulls. Incidentally, we were actually forced to write a piece defending our firm after Jim Cramer accused us of orchestrating a bear raid on the company.
What a difference a year or two makes.
Take another look at the table above. The relevant tickers for Linn are LINE and LNCO. You can make up your own mind about who got the call right.
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Editor’s Note: Kaiser’s most recent short call is Genesis Energy (GEL). A full listing of Kaiser’s energy research is available upon request. If you’d like to learn more about how you can subscribe to his research as well as our other institutional research, please email firstname.lastname@example.org.