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By Josh Peters, CFA and Jeremy Glaser | 11-05-2015 05:00 PM

2 MLPs That Stay Afloat When Energy Prices Sink

MLPs that are closer to the consumer will see more consistent demand, volumes, and fees, says Morningstar's Josh Peters.

Note: This video is part of Morningstar's November 2015 Income Investing Week special report.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined by Josh Peters--he is the editor of Morningstar DividendInvestor newsletter and also the director of equity-income strategy here at Morningstar. He's going to give us an update on what's happening in midstream energy.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy. It's common topic these days.

Glaser: Yes, this has been obviously a popular topic for dividend investors and elsewhere.

Peters: Popular, painful, and not yet quite ready to go away and fade into the background, it seems.

Glaser: We have seen some earnings recently that have kind of brought it back to the forefront again. When you look at midstream earnings and you look at how these companies are coping with low energy prices now, what's being revealed to you?

Peters: Oh, boy--I really hate to use this cliché, but this is the tide going out, and we're discovering who has been swimming without proper attire. All of these midstream operators are really on a scale from utilitylike--which are the real toll-road operators that everybody likes to talk about but not everybody in midstream energy really is--to companies that are really no less volatile than the E&Ps who are their customers. If you're in the business of running pipes out to the wellhead and gathering gas or gathering crude oil, you may be charging fees per gallon or per thousand cubic feet of gas, but if there is no drilling, there is no well. If there is no well, there is no gas. If there is no gas, there is no fee. So, that can turn out to actually be a pretty tough business.

So, I like to think of it as the closer you are to the consumer, the more consistent the demand is going to be, and the more those fees and the volumes are going to be consistent. That's really where you're going to find the consistent cash flows that people have started to assume that every partnership out there could generate--that is not, in fact, turning out to be the case.

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