2014 was a year of divergence for the two major types of pass-through income stocks. real estate investment trusts – REITs – had a great year, with the Dow Jones REIT index posting a 32.4% total return for the year. The other class of income stocks, master limited partnerships – MLPs – was hit by falling crude and natural gas prices, which led to a general sell-off across the energy sector. The Alerian MLP index lost 12% in the fourth quarter, to end up down 0.9% for the year. Distributions pulled the index's total return back up to a positive 4.8%. The Alerian index is heavily weighted to the large-cap MLPs and does not well represent the sector. The equal weight version of the MLP index lost 11.9% for 2014.
Investors panicked as it appeared crude oil had fallen off a cliff.
Fear about MLPs remains in the market, with crude oil below $50 per barrel and down over 50% since mid-2014. Almost all you hear or read from the news media is how oil will next go to $30 or we are in for a long period of sub-$50 oil, which will hammer energy sector profits. However, the history of crude oil prices does not support that outlook. This fact was recently provided on CNBC:
“Oil has sold off 50% within 6 months a total of 5 times since 1980. In the 6 months following the previous declines oil was up 5 out of 5 times, and the average gain was a whopping 52%.”
The energy commodities – especially crude oil – have unique characteristics that make it highly unlikely that prices can stay down for an extended period of time:
