A little more than a year ago in December 2014, this blog cautioned investors to beware falling oil and gasoline prices. One area of concern at the time was an investment called a “master limited partnership”, or MLP. We cautioned that investors in MLPs ran the risk of getting crushed.
We hate to say it, but we were right.
As we have noted repeatedly in the zero interest rate environment, investors have been chasing yield and brokers have been selling them increasingly riskier investments, from nontraded REITs to oil and gas MLPs. Brokers touted the 7% to 10% annual returns that such MLPs have generated in the past. However, many of those brokers also failed to mention the significant risk of declining oil prices on clients’ investments.
One year ago, there was concern that oil, which had declined from $100 a barrel to $50 a barrel, would lead to defaults in high yield oil investments, particularly the shale fields in the Dakotas.
The investment industry should have paid more attention to those concerns. Last week, oil reached a 12 year low, falling to $32 a barrel. This week, the price of oil has eroded even further, slipping briefly below $30 per barrel. And there are forecasts that soon, oil could dip into the $20s.
Indeed, the prospects for the future of energy investments are quite dim, particularly with the huge over supply of oil and the increasing use of alternatives such as solar and wind.
Against such a negative and declining backdrop for oil, it is quite surprising that brokerage firms like JP Morgan, Barclays and Wells Fargo in 2015 sold oil and gas and energy investments to conservative retail investors who are in need of income to support their lifestyle and retirement.
According to a post on a web site called 24/7 Wall Street from 12 months ago, JP Morgan was pushing MLPs Kinder Morgan and Enterprise Products Partners as “blue chip” investments for retail portfolios. At the time, they were trading, respectively, at $41 and $32 per share.
Kinder has since dropped 68% and is now trading around $13 per share, while Enterprise Products is trading around $23 per share.
Adding insult to injury, many MLPs recently started to slash dividends, which was the main inducement for Mom and Pop investors to buy them.
Another punch in the gut for MLP investors may come from the IRS.
The tax collector recently notified customers and their retirement custodians who own Kinder Morgan shares that they owe a substantial amount in taxes, interest and penalties on shares purchased in tax-deferred retirement plans and IRA accounts, according to a post on the web site Investopedia.com. Kinder Morgan recently changed its corporate structure, triggering the taxable event, according to the website’s report.
The red lights and alarm bells are flashing. Retail investors beware energy investments, particularly MLPs.
We expect many lawsuits and arbitration cases to be filed by investors against their brokerage firms for selling risky energy investments without proper risk disclosure. The record shows that Wall Street was pushing oil and gas investments 12 months ago, at exactly the wrong time for Mom and Pop investors to buy. Notoriously volatile investments, oil and gas companies are shaping up to be another sad story for investors.
Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.