Conglomerates, MLPs, Chevron – Reality Check

oildownRemember back in the 70s and early 80s, everything was all about the conglomerates? Companies gobbled up smaller companies, with everyone – except those in the larger companies who knew better – believing all was safe and good in Corporate America. Only problem was, the smaller companies were not only gobbled, but spit out, part by part until there was nothing left but a sad memory, a warm beer and some country music song to send it out. Eventually, this seemingly “strengthening” effort of the larger companies became their downfall. By picking and choosing through the process of piecing different parts, these conglomerates themselves became weakened and were quickly deemed relics of days gone by. This corporate strategy was all fine and good for a little while, but it simply wasn’t financially feasible. It was a failure, but it took more than a decade for it to come full circle. Sometimes, bigger is not better.

Now, though, we have the master limited partnerships. These trusts are designed with more than a few benefits in mind, most importantly, their tax advantages. Few things in the American economy are taxed just once. Take estate planning, for instance, people with considerable wealth set up trusts for their assets so that those who receive their inheritances don’t have to worry about estate taxes eating up what their loved ones worked their lives to provide. MLPs work in a similar way. They’re designed to bypass some of the taxes, at least temporarily. It gets complicated because of the absence of the familiar 1099s in lieu of the sometimes complicated S K-1 forms.

At any rate, MLPs are found in the energy sector – oil companies, upstream, midstream and downstream companies, etc. and are traded on the securities markets. They contain several different entities from seemingly unlikely acquisitions, such as retail stores. They’re supposed to be the cure-all, except oil and gas is struggling…as in struuuugggggling.

The big players, of course – Chevron, Exxon and the like are holding on by a thread. The question is: why? These companies have been through it all. Nothing’s working. Their earnings – are they even still an option at this point? Cash flow? That’s a joke. And despite talk of the future, with big promises, it’s simply too far out. Not only that, but the money to secure this future is borrowed. Just like the conglomerates of yesteryear, these companies are just too bulky, are laying off left and right and frankly, are threatening the entire sector. The reality is this sector is fragile. There are too many things unfolding that ensure it doesn’t regain quickly and depending on the damage Obama can do in his final days in office, it could be permanent. The one thing anyone who relies on this industry wants to see is the big daddies sitting pretty. They’re not.

Without going too much into the outside factors, including Iran, Russia and China and other dynamics – most of which I’ve written about extensively in the past, it’s time to shoot the ailing dog. The days of $100 per barrel are gone. Even with a comeback, those who are underestimating Obama’s goals are fools. There’s a reason he’s been quiet the past few weeks and if you’re wondering what he’s been up to, look no further than here and here – you probably haven’t seen either of these stories in the 5 o’clock news, what with the Trump/Kelly war and of course, the U.S./Cuba new best friend status. Don’t underestimate him; the fact that the Iran sanctions are now moot is proof that he does hold power, God help us all. I’ve said for more than a year that shale’s too expensive and with the state of the entire sector, those who insist on pushing it might as well line their horizontal drills with their dollars.

While we’ve yet to see the “too big to fail” banks really pay their dues for the havoc they wreaked in 2008 and earlier, the energy sector, even with the protective mama bear MLPs, won’t enjoy the same fate, but will likely go down in a flaming ball of good intentions, just as the conglomerates did years ago. There is no Reagan or Bush White House. And, if you’re keeping up: Rick Perry, despite Kelcy Warren’s millions, is sinking fast.

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