EV Energy Partners: Risk Likely to Take Its Toll

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous, so looking for stocks based on what you already know and own might be a path to pursue.

Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five, helps you focus your attention by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list and then scans stocks picked by highly rated players with lists similar to yours, as well as industries in which you currently have active picks, and it targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my having weighed in on energy plays such as McMoRan Exploration, HollyFrontier , and Cheniere Energy that I rated to outperform the broad market indexes, as well as Teekay Tankers and FX Energy, which I saw underperforming, the CAPS supercomputer thought I also might be interested in EV Energy Partners , a master limited partnership with significant interests in the Barnett shale region.

It was one of five Stocks of the Day it offered up for my consideration this week, and though it offers a tempting dividend that currently yields around 5%, just remember as smart as the CAPS algorithm may be, it's still just an algorithm. So be sure to look before you leap on any of its suggestions.

EV Energy Partners snapshot

Source: FinViz.com.

Pipeline to profits
Master limited partnerships were pretty much born with oil and gas pipelines in mind. For an MLP such as Enterprise Products Partners or Enbridge , it doesn't matter what the underlying cost of oil and gas is, as they're collecting fees for the fuel passing through. In that regard they're acting like toll collectors, taking a cut for every car that goes through the gate and paying investors a steady dividend on the profits they derive.

But there's a relatively new breed of MLP on the market of which investors need to be wary. Drillers such as EV Energy, Linn Energy , and EXCO Resources find themselves heavily reliant on the price of oil and gas to make their distributions, because it determines how much they produce. Others, such as Hi-Crush Partners, base their payout on the production of sand used in fracking, while Alon USA Partners operates refineries and a chain of convenience stores. Because these are not the usual stripe of MLP, they carry greater risk.

A surfeit of gas
Now EV Energy owns large tracts in some of the most important and prolific shale regions in the country, including the Barnett, Utica, and Mid-Continent shales, as well as properties in the Permian and Appalachian basins. They've also hedged virtually all of their production at prices higher than the market currently pays, and while that offers some downside protection, if the low-price environment is protracted, they may be forced to write down the value of their assets.

Everything seems to point toward a secular bear market when it comes to natural gas pricing. While they were up last week at the Henry Hub to $3.43 per million Btus as temperatures in the Northeast fell, and working natural gas in storage declined, inventories remained well above the five-year average. Moreover, drillers continue to reduce their rigs in service, with Baker Hughes reporting they fell to 434 units in operation, a 45% decline from the year ago period.

While there's a lot to like about EV Energy Partners, particularly the long-term outlook for natural gas demand -- I think nat-gas vehicles will be big -- I find the risks too great to want to put my money into it. The shift won't come for many years and the prospects for an industry turnaround are still remote. I'll be marking EV Energy to underperform the indexes on CAPS, but let me know in the comments box below why you think it can still turn in a masterful performance.

The growing production of natural gas from hydraulic fracturing and horizontal drilling is flooding the North American market and resulting in record-low prices for natural gas. Enterprise Products Partners, with its superior integrated asset base, can profit from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.

The article EV Energy Partners: Risk Likely to Take Its Toll originally appeared on Fool.com.

Rich Duprey owns shares of McMoRan Exploration. The Motley Fool recommends Enterprise Products Partners and owns shares of Hi-Crush Partners. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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