The Cash Pipeline

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On the commodity front opportunity exists. This past week, one of the major story headlines was that crude oil declined below the $46 level, a low not seen since November. The decline was mainly related to an increase in production from Libya and weaker demand from both the United States and China.

The Energy Information Administration (EIA) inventory report showed that crude oil stockpiles only declined 930,000 barrels, while expectations were for a 2.3 million barrel decrease. Despite seven straight weeks of oil inventory declines, oil still can not find a base.

This sell-off in oil is exactly what we’ve been looking for to add some energy names to our portfolio, as we are seeing heavy selling similar to when crude oil was sitting in the $30s. There are a lot of strong companies that we really like Schlumberger (NYSE:SLB), EOG Resources (NYSE:EOG), Cimarex (NYSE:XEC), Apache (NYSE:APA), and Magellan Midstream Partners (NYSE:MMP). These companies represent some best names in energy, and as stockpile declines create opportunity, we have pounced.

Magellan Midstream is America’s largest master limited partnership (MLP), that primarily transports, stores, and distributes petroleum products. The partnership consists of 9,700 miles of pipelines and 53 storage terminals that are capable of holding 42 million barrels of petroleum products such as gasoline, diesel fuel, and crude oil.

 

One of the many reasons we find Magellan Midstream so attractive as oil dips is because MLPs have steady distributable cash flow (DCF) through long term contracts. This means that they are highly insensitive to commodity prices. Also, because 58% of its business is in refined products and 10% is in marine storage (two segments that do well in a low commodity pricing environment) Magellan Midstream’s business model offers a strong degree of safety against low commodity prices.

 

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