Risks in pipeline stocks

 Dear Mr. Berko: 

My adviser wants me to sell Kinder Morgan, Buckeye Partners and Enterprise Products Partners, which I bought in 2008, because he thinks the pipeline stocks have too many risks. Please tell me what those risks are and whether I should follow my adviser’s advice. 
— HP, Vancouver, Wash.
 
Dear HP: 
1) An oversupply of oil and gas or a deep U.S. recession would force a significant decline in demand and collapse the price of these commodities. Master limited partnership values would crash, too. Lower prices and reduced product flow could cramp MLPs, preventing them from generating the cash flow to pay principal and interest on the money they borrowed to build infrastructure. I doubt there will be an oversupply. While consumption of oil and gas in the U.S. continues to decline modestly, world demand will continue to grow, especially in India, China and Africa. As reserves of major oil-producing countries — such as Russia, Saudi Arabia and Venezuela — are being slowly depleted, new discoveries and improved extraction methods have made the U.S. more energy-productive. The U.S. is now becoming an oil exporter. A recession does concern me. The time frames between recessions appear to be shorter. Their durations seem to last longer. The effects have become more severe. The recoveries are more painful. And the financial and social dislocations are more widespread and pronounced. I rank this threat to MLP values as low.
2) A change in the federal non-taxability of MLP distributions, which are treated as a “return of principal” and not subject to ordinary income taxes. The Canadian government recently changed the tax laws on Canadian royalty trusts, and the value of those equities crashed like boulders from tall shoulders. I recently spoke with two people who are in a good position to know whether Congress has any plans to change those laws. Both indicated there is nothing in subcommittee to indicate this intent. However, there is an inexorable drive among Congress to spend money, and spending public money is definitely a more pleasurable behavior for members of Congress than sex. Still, I rate this threat as very low.
3) The government could grant pipeline permits to new MLPs to compete with the existing routes of old MLPs. This would create price wars, forcing some MLPs into bankruptcy and others into mergers. There’s plenty of bribe money to influence Congress to encourage this to happen. There are 535 of these leeches, and they have very lo-o-ng, sticky fingers. Today’s pipelines are not unlike the railroads of 150 years ago, when money in your congressman’s hands determined when and where those tracks could be built. Meanwhile, there’s a presidential election coming up in 2016, and most members of Congress would cook their mothers for money. Scary backroom deals are possible, but I rank this threat as low.
4) The stupids. The fringe groups of extremists/environmentalists who fervently, passionately, biologically, psychologically and emotionally believe in their cause — and the wannabes who hang with these groups to get laid. These stupids are dangerous, but the risk factor is also low.
5) Elon Musk designs an 1,800-yard spacecraft to transport oil and gas cheaper and faster, using a gravity-induced force field powered by eight Duracell 9-volt batteries. There’s no risk here until 2066.
Pipelines move commodities such as gas, water and coal from point A to destination B. And they are certainly cleaner, have almost no carbon footprints and are less costly and less risky than a winding line of noisy railroad tank cars. Pipelines have very few moving parts, so there’s essentially zero maintenance. And because they employ far fewer people per delivery barrel, labor costs are a low factor in an MLP operation. It costs between $16 and $22 to ship a barrel of oil by train from Canada to the U.S., whereas it costs between $7 and $11 to ship that oil by pipeline to the same destination. As long as that price differential remains, the pipelines are here to stay. And so are the three magnificent issues you own. Meanwhile, this brokster is bad for your financial health; can him before he spills.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
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