Update January 11, 2017. Tracing this chain of cause and effect is pretty simple: OPEC cuts oil production to raise oil prices; U.S. shale producers with low costs increase drilling and output (by a forecast 250,000 barrels a day in 2017); U.S. pipeline MLPs (master limited partnerships) see higher volumes and higher revenues; MLPs raise distributions; income investors smile.
This process is going to take a while, depending on what shale geologies a pipeline system serves. Some pipeline companies will see higher volumes by the middle of 2017. Others may have to wait until 2018.
But the prospect of increased distributions over the next 12 months is really, really important. With the Federal Reserve having raised interest rates once in 2016 and promising/threatening two to three more increases in 2017, dividend paying stocks have a big advantage over bonds–as long as they can manage to grow distributions fast enough to keep up with (or exceed if investors are lucky) the rise in interest rates from the Fed. Bonds, which pay a fixed amount of interest, will get hit by rising interest rates in 2017–maybe even harder than they were hit in 2016. Dividend stocks that don’t manage to increase distributions will get hurt too. But dividend paying stocks that can manage to increase payouts should do OK in 2017–and maybe better than OK since they will be the only game in town for income investors looking to preserve capital and collect a solid income.
ONEOK Partners (OKS), a member of my Dividend Portfolio, should be one of the earlier beneficiaries of OPEC’s production cuts. ONEOK has pipeline exposure to the SCOOP and STACK formations of Oklahoma, two of the hottest new shale geologies, and to the Bakken Shale. The Bakken had seen a lot of drilled but uncompleted wells in 2016, as producers cut capital spending on new production, but that backlog has fallen and looks likely to fall further. A lot of Bakken production is in the form of natural gas liquids (NGL), which require not only shipment by pipeline but also fractioning to divide the flow into specific chemical industry feedstocks. That happens to be a business that ONEOK is in.
Standard & Poor’s sees distributions per MLP unit rising from $3.16 in 2016 to $3.19 in 2017. That’s not a very big increase, but it does signal the change in the trend for distributions. And that shift will drive the unit price for this MLP higher.
As of January 11, 2017, I’m keeping ONEOK Partners in my Dividend portfolio. The units currently yield 7.1%. I’d be happy with a 10% gain in price in 2017 plus that yield.