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MLPs: There's Good News And Bad

|Includes: Enterprise Products Partners L.P. (EPD), KMP, PAA

High-yielding master limited partnerships (MLPs) are likely to head lower before forming a bottom, but patient income investors may soon find favorable long-term entry points.

Long-term annualized returns of the top master limited partnerships (MLPs) have been impressive, but the sharp slide in crude oil prices has hit them hard over the past six weeks. One of the most widely held is Enterprise Products Partners LP (EPD), which is down 12.6% from the early-May highs.

This is the good news for new buyers of MLPs since at the May price high of $52.94, EPD, which pays a dividend of $2.51, was yielding 4.7%. At Monday's closing price of $46.23, it is now yielding 5.4%. For those who are already long, however, it has been a rough five weeks.

The weekly technical action seen in MLPs suggests they are likely to drop even further over the coming weeks. The long-term support for August crude oil in the $78.50-$80 area may be tested before a bottom is in place, and that is the bad news for the leading MLPs, which could lose another 3-6% before they finally bottom out. Such a decline is likely to present good long-term buying opportunities, however.

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Chart Analysis: Enterprise Products Partners LP (EPD) is a $40.8 billion, Houston-based MLP that traded as low as $38.01 at last October's lows.

  • The 50% Fibonacci retracement support from the October lows is at $44.70, and the breakout level from last fall is now at $43.50, line a
  • More important 61.8% support is at $42.70
  • Weekly on-balance volume (OBV) dropped below its weighted moving average (WMA) on May 12, and the uptrend, line b, was broken last week
  • There is initial resistance in the $48.50-$50 area

Kinder Morgan Energy Partners LP (KMP) is a $25.8 billion MLP that pays a current dividend of $4.80. Considering Monday's close at $76.23, the yield is 6.3%.

  • KMP traded as high as $90.60 in February and is currently down 15.8% from those highs
  • The long-term chart shows that former resistance (now support) at line c is being tested
  • The uptrend from the 2008 lows, line d, is now in the $71.50 area
  • Weekly OBV did confirm the price highs early in the year, but it has recently violated short-term support at line e
  • OBV is below its weighted moving average but still well above the long-term support at line f
  • There is now resistance in the $78.20-$79.50 area

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Plains All American Pipeline LP (PAA) is a $12.3 billion MLP that pays a dividend of $4.18 for a current yield of 5.4%.

  • PAA has one of the strongest long-term charts, as it is down just 9.5% from the March high at $84.48
  • It is still holding well above the 38.2% Fibonacci retracement support at $72.90, which is calculated from the October lows at $54.90
  • The 50% retracement support stands at $70 with the 61.8% support at $65.90
  • Weekly OBV surged to a significant new high in March and confirmed the price action
  • There is first resistance now at $78.50-$79 and a close above $82.50 would signal that the correction is over

What It Means: Plains All American Pipeline LP (PAA) has the strongest chart of the three and is my top choice. Given the negative weekly analysis, however, I would be a patient buyer until there are clear signs that these MLPs have bottomed out.

Do not commit more than 5-7% of your total portfolio to these MLPs, and because of their particular tax considerations, consult an accountant or tax advisor before purchasing any MLPs.

For those who are already long, now seems a bit too late to be selling them, but be sure to have stops in place in case my analysis is too optimistic.

How to Profit: For Plains All American Pipeline LP (PAA), go 50% long at $74.54 and 50% long at $73.60 with a stop at $69.22 (risk of approx. 6.5%).

For Kinder Morgan Energy Partners LP (KMP), go 50% long at $74.74 and 50% long at $73.10 with a stop at $71.80 (risk of approx. 2.9%).

For Enterprise Products Partners LP (EPD), go 50% long at $45.02 and 50% long at $43.80 with a stop at $41.82 (risk of approx. 5.9%).