Warren Buffett Likes MLPs and I Don't Blame Him

Written by Jason Simpkins
Posted March 8, 2016

With energy prices tanking, master limited partnerships (MLPs) – companies in the oil and gas transport business – have slumped hard.

But that decline has been well overdone.

Remember, MLPs get paid on volume – the amount of oil and gas they pump through their pipelines. So it doesn't matter what oil is trading at, so long as it's being pumped, transported, and stored.

Now, I understand that declining production follows declining prices. But the oil and gas glut is still so big, that a decline in production really doesn't matter. There's more than enough oil to move. And in fact, demand is being accelerated by lower prices.

MLPs also aren't saddled with the high production costs and huge debt burdens many producers are.

So they don't really deserve to get crushed.

Still, they have been, and that makes them bargains – something many investors are coming to realize.

Indeed, after hitting a 52-week low of $7.97 on Feb 11, the Alerian MLP ETF (NYSE: AMLP )has rebounded by 26%.

Among those buying into MLPs is Warren Buffett's own Berkshire Hathaway (BRK.A, BRK.B).

The firm has been accumulating a stake in Phillips 66 (NYSE: PSX) for years, and added $1 billion of stock earlier this year. It now owns 14% of the company.

Phillips 66 spun-off its midstream pipeline business last year, but it's still the general partner of Phillips 66 Partners (NYSE: PSXP).

PSX isn't the only midstream business Buffett's interested in, either.

Berkshire is moving into Kinder Morgan (NYSE: KMI), as well. It's unveiled a $400 million stake in that company.

George Soros is another Kinder Morgan Investor. He owns stake of 50,700 shares, worth now about $887,000. And hedge fund manager Tepper's disclosed holding is about 9.5 million shares, worth about $163 million

Like Phillips, Kinder Morgan is no longer an MLP itself. It restructured in 2014. But it still owns the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P (NYSE: KMP).

KMI is a leviathan in the pipeline business, with operating interests in roughly 84,000 miles of pipelines and around 180 terminals. It's absurdly cheap right now – despite being up 30% since mid-February.

PSX is up almost 20% in that time.

If you're looking for some bargains in the energy sector, these two are as good as any you'll find.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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