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By Josh Peters, CFA and Jeremy Glaser | 09-23-2015 12:00 AM

This MLP Is Downturn-Ready

Spectra Energy Partners has a very attractive set of assets for any type of environment, but particularly right now, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Josh Peters--he is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. We're going to take a closer look at Spectra Energy Partners (SEP) and Spectra Energy Corporation (SE).

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: In a previous video, we talked about midstream energy, particularly in light of the big declines there. We talked about how you like companies that are a little bit closer to the consumer versus the producers. When you think about Spectra Energy Partners, where does it really fall on that consumer/producer line?

Peters: I still think you have to be extremely selective, and we're continuing to see the drop in these midstream names. A good index, if you like to monitor it, is ticker symbol AMZ--the Alerian MLP Index. Even as the rest of the market has rebounded and stabilized a little bit, it's continuing to make new lows. Oil is not making new lows anymore, but the midstream names are, and you've got a lot of things feeding into it. Energy, as the much larger sector surrounding the MLP group, remains under pressure. In addition to that, you've got leverage holders as well as perhaps less sophisticated investors who didn't really realize that what they were buying had anything other than a yield--that there was also a risk there. You have people panicking.

A lot of these are owned through tax-shield type vehicles, whether they are ETFs or open-end funds or closed-end funds. And if you get into indiscriminant selling, these funds, in turn, have to sell MLPs, even some of the C-corps in the business. You've got a real rout going on. I'm too smart, I'd like think--or too chicken anyway--to call a bottom. There will be one at some point. But I think before this is over, you're also going to see dividend distribution cuts from some of the weaker names in the sector. So, I think you've got to be very selective. A good rule of thumb is get closer to the customers--get closer to the consumers of energy who will actually benefit from lower prices; if anything, volumes will be stimulated by lower prices, as opposed to being out there in the producing basins where drilling activity slows down. That means lower volumes on which you charge your fees, perhaps lower commodity-sensitive earnings as well as prices are low. So, sticking closer to consumers, I think, is where you want to be.

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